10-K 1 form10k.htm LONGWEI PETROLEUM INVESTMENT HOLDING LTD FORM 10-K form10k.htm
UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
 
þ
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended June 30, 2012
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period for          , 2012
 
Commission File No. 001-34793

LONGWEI PETROLEUM
INVESTMENT HOLDING LIMITED

 (Name of registrant as specified in its charter)
 
Colorado
 
84-1536518
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
 
No. 30 Dajingyu Street, Xiaojingyu Xiang, Wan Bailin District, Taiyuan City,
Shanxi Province, China
 
030024
(Address of principal executive offices)
 
(Zip Code)
 
(727) 641-1357
 (Registrant’s telephone number, including area code)
 
Securities registered under Section 12(b) of the Exchange Act:
     
Title of each class registered:
 
Name of each exchange on which registered:
Common Stock, no par value
 
NYSE MKT
 
Securities registered under Section 12(g) of the Exchange Act: Common Stock, no par value per share.
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.        Yes o     No  þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o      No  þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  þ   No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   Yes  þ   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
  o
 
Accelerated filer
o
         
Non-accelerated filer
(Do not check if a smaller reporting company)
  o
 
Smaller reporting company
þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o   No  þ
 
Revenues for year ended June 30, 2012: $510,592,844
 
The aggregate market value of the registrant’s voting common stock held by non-affiliates as of December 31, 2011 based upon the closing price reported for such date on the NYSE MKT was US $43,787,856.

As of September 13, 2012 the registrant had 100,939,966 shares of its common stock issued and outstanding.

Documents Incorporated by Reference: None.
 
 
 
   
PAGE
 
PART I
 
3
22
22
22
22
     
 
PART II
 
22
24
25
35
36
36
37
     
 
PART III
 
37
41
43
44
44
     
 
PART IV
 
45
     
  47
 
 
PART I
 
 
Overview
 
Longwei Petroleum Investment Holding Limited (the “Company”) is an energy company engaged in the wholesale distribution of finished petroleum products in the People’s Republic of China (the “PRC”).  The Company’s oil and gas operations consist of transporting, storage and selling finished petroleum products, entirely in the PRC.  The Company purchases diesel, gasoline, fuel oil and solvents (the “Products”) from various petroleum refineries in the PRC. The Company’s headquarters are located in Taiyuan City, Shanxi Province (“Taiyuan”). The Company has a storage capacity for its Products of 120,000 metric tons located at its fuel depot storage facilities in Taiyuan and in Gujiao, Shanxi (“Gujiao”), 50,000 metric tons and 70,000 metric tons of capacity, respectively, at each location. The Gujiao facility was acquired in January of 2009 and commenced operations in November of 2009. The Company is 1 of 3 licensed intermediaries in Taiyuan and the sole licensed intermediary in Gujiao that operates its own large scale storage tanks. The Company has the necessary licenses to operate and sell Products not only in Shanxi but throughout the entire PRC.  The Company seeks to earn profits by selling its Products at competitive prices with timely delivery to transportation companies, coal mining operations, power supply customers, large-scale gas stations and small, independent gas stations. The Company also earns revenue from agency fees by acting as a purchasing agent for other intermediaries in Shanxi, and through limited sales of diesel and gasoline at two retail gas stations, each located at the Company’s facilities. The sales price and the cost basis of the Company’s products are largely dependent on regulations and price control measures instituted and controlled by the PRC government as well as the price of crude oil. The price of crude oil is subject to fluctuation due to a variety of factors, all of which are beyond the Company’s control.

The Company was incorporated under the laws of the State of Colorado on March 17, 2000 as Tabatha II, Inc.  On October 12, 2007, the Company changed its name to Longwei Petroleum Investment Holding Limited.

For the year ended June 30, 2012, we reported revenues of $510,592,844, an increase of 6.0% from revenues of $481,553,021 reported for the year ended June 30, 2011. 

A summary of our operating results and select balance sheet data for the years ended June 30, 2008 through 2012 are as follows:
 
Select Historical Financial Data for the Years Ended June 30, 2012 - 2008
 
(Amounts in $USD Millions)
 
2012
   
2011
   
2010
   
2009
   
2008
 
Revenues
 
$
510.6
   
$
481.6
   
$
343.2
   
$
196.8
   
$
143.8
 
Annual Revenue Growth
   
6.0
%
   
40.3
%
   
74.4
%
   
36.99
%
   
53.4
%
Net Income
 
$
65.1
   
$
62.7
   
$
50.2
   
$
21.8
   
$
20.7
 
Annual Net Income Growth
   
3.8
%
   
24.9
%
   
130.3
%
   
5.3
%
   
72.5
%
Total Assets
 
$
342.3
   
$
273.3
   
$
187.6
   
$
120.1
   
$
93.4
 
Total Liabilities
 
$
8.8
   
$
11.6
   
$
9.7
   
$
5.2
   
$
4.9
 
Total Shareholder’s Equity
 
$
333.5
   
$
261.7
   
$
177.9
   
$
114.9
   
$
88.5
 
 
Customers

The Company sells its products directly to commercial, industrial, retail and wholesale customers throughout Shanxi Province in the PRC from its two fuel depot storage facilities.  We normally enter into supply contracts with our customers and require customers to purchase a minimum amount of specified petroleum products at market price during each period of the contract.  The contract’s pricing typically resets every 30 days.  Payments are due upon receipt of the products unless the customer has been pre-approved for payment terms.  Approximately 75% of our revenues are cash-payment only upon delivery, and certain large customers are preapproved for payment terms of up to 90 days. Customers may take delivery of their purchases at our fuel depots or pay us to deliver to their location.

For each of the last three fiscal years we have derived 100% of our revenues within the PRC.  Our long-lived assets are also 100% domiciled within the PRC.  Since 100% of the Company’s operations are carried out within the PRC, our financial condition and results of operations may be influenced by the political, economic and legal environment within the PRC, as well as by the general state of the PRC economy.  In addition, the Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, regulations on foreign exchange control regarding exchange transactions, and rates and methods of taxation, among other things.

The strong, sustained economic growth in the PRC surpassed Japan in 2010 as the world’s second largest economy in terms of Gross Domestic Product (“GDP”), BBC News, February 14, 2011. The GDP growth rate in the PRC during 2011 was 9.0%, and it is expected to slow to 8.2% in 2012, due to the worldwide general economic downturn but rebound to 8.6% in 2013, according to the World Bank, CNN Money, April 13, 2012.  The GDP growth rate for Shanxi Province during 2011 was 13% according to the China Daily, March 13, 2012, and it is expected to outpace the general economic growth in the PRC for 2012.
 

The development of Central China has become the focus of the PRC’s economic growth plan amid the slowly recovering global economy and the slower general GDP expansion, with key industries such as agriculture, energy and machinery being promoted by the government.  "The development of the central region has become an important factor supporting China's economic growth and is closely related to the transformation of the country's economic growth pattern and the adjustment of its economic structure," Vice-Premier Wang Qishan, told the Expo Central China 2012 in May 2012.  The event was jointly held by the central provinces of the PRC, including Shanxi, Hunan, Hubei, Jiangxi, Anhui and Henan provinces, which account for one-fourth of the PRC’s population and one-fifth of its GDP, according to the China Daily, May 19, 2012.

The PRC is the world’s second largest consumer of petroleum products behind the United States, according to www.platts.com. In a report released on September 4, 2012 by the US Energy Information Administration (“EIA”), China’s oil consumption will continue to rise in 2012 and 2013, with oil consumption reaching 9.8 million barrels per day in 2011 and almost doubling to 17 million barrels per day by 2035.  The Platts Report released August 22, 2012, forecasts oil demand growth in the PRC to be 3% - 4% for 2012 in spite of the worldwide economic downturn.  Also in a recent report from the International Energy Agency the PRC was named the top global energy consumer.
 
The Business Monitor International, China Oil and Gas Report (BMI) forecasts that the demand for gasoline and diesel, which is still relatively low on a per capita basis, has been on a steady increase and is projected to continue to grow in line with rising car ownership and industrial/agriculture production in the PRC.

Percentage of Product Sales Revenue by Customer Class for the Years Ended June 30
 
Customers Classification
 
2012
   
2011
 
Industrial Users, Coal Operations & Power Generation
   
51
%
   
50
%
Large-Scale Gas Stations
   
35
%
   
34
%
Small, Independent Gas Stations
   
14
%
   
16
%
 
Our industrial customers are primarily transportation companies, coal mining operations and power generation plants, which use diesel, gasoline, fuel oil and solvents and accounted for approximately 51% and 50% of our product revenues for the years ended June 30, 2012 and 2011, respectively.  Industrial users remain our largest customer category primarily because of our Gujiao facility, which is strategically located in an industrial region.  Industrial customers are also our primary source of agency fee revenues because of the large quantity of product required for their operations.
 
Large-scale gas stations accounted for approximately 35% and 34% of our product revenues for the years ended June 30, 2012 and 2011, respectively.  Our third largest group of customers consists of small, independent gas stations. These small, independent operators were impacted by rising consumer prices and decreased as a percentage of total product revenues to approximately 14% from 16% for the year ended June 30, 2012 and 2011, respectively. These customers primarily buy diesel and gasoline to support their retail network of gas stations to fuel the growing demand of new automobiles on the roads in the PRC.  These customers depend on our timely delivery and customer service compared to the larger state-owned enterprises.
 
The Company has forty-six major customers, which each account for at least 1% (or approximately $5.1 million) or more of total revenues.  No customer accounted for more than 2.7% or 2.8% of our total revenues, respectively, for the years ended June 30, 2012 and 2011.  The Company’s top ten customers by revenues for the years ended June 30, 2012 and 2011 cumulatively represented approximately 23.7% and 24.0% of our total revenues, respectively.  No customer accounted for more than 7.3% or 8.7% of our total accounts receivable balance at June 30, 2012 and 2011, respectively.

Products
 
We purchase diesel, gasoline, fuel oil and solvents from various petroleum refineries in the PRC.  We have historically sold large quantities of diesel and gasoline products and have a large and expanding supply chain in place. We do not generally modify the products prior to sale. However, in some scenarios the Company will further blend or modify our products upon the request of our customers, including ethanol blending.

 
Our percentage of product mix, total revenue and average profit margin by product category for years ended June 30, 2012 and 2011 are listed below:
 
Product Mix, Percentage of Total Revenue and Average Profit Margin
by Product Line for the Years Ended
 
   
June 30, 2012
   
June 30, 2011
 
Product
 
Product Mix
   
% Total
Revenue
   
Wt. Avg.
Profit Margin
   
Product Mix
   
% Total
Revenue
   
Wt. Avg.
Profit Margin
 
Diesel
   
45.8
%
   
43.9
%
   
12.5
%
   
48.3
%
   
45.9
%
   
16.5
%
Gasoline
   
49.7
%
   
47.8
%
   
14.2
%
   
49.4
%
   
47.0
%
   
15.7
%
Fuel Oil
   
2.0
%
   
1.9
%
   
29.8
%
   
1.0
%
   
0.9
%
   
18.6
%
Solvents
   
2.5
%
   
2.4
%
   
27.2
%
   
1.3
%
   
1.3
%
   
23.8
%
Product Sales Total
   
100.0
%
   
96.0
%
   
13.9
%
   
100.0
%
   
95.1
%
   
16.2
%
                                                 
Agency Fees
           
4.0
%
   
100.0
%
           
4.9
%
   
100.0
%
                                                 
TOTAL
           
100.0
%
   
17.3
%
           
100.0
%
   
20.3
%
 
* Agency fee revenues consist of fees, similar to a sales commission, charged to intermediaries who lack the required licenses to purchase directly from refineries, as well as the volume purchasing capability of the Company. Agency fee revenues are recognized when there is evidence of an arrangement that specifies pricing and irrevocable receipt of product and collection has occurred. Cost of agency fee service revenues consists of selling commission, transportation or other costs, if any, associated with the agency fee arrangement.  For the years ended June 30, 2012 and 2011, respectively, the Company stopped transporting or handling the products associated with the agency sales and only acted in a broker capacity allowing other intermediaries to use its licenses to take possession of the products.  The Company considers any costs associated with Agency Fee revenues immaterial and has not allocated any costs to Agency Fees.
 
Facilities & Storage

The Company’s oil and gas operations consist of transporting, storage and selling finished petroleum products from its two fuel storage depots.   The Company’s headquarters are located in Taiyuan, Shanxi.  The Company has a total storage capacity for its Products of 120,000 metric tons located at its fuel depot storage facilities in Taiyuan and in Gujiao, Shanxi; 50,000 metric tons and 70,000 metric tons capacity, respectively at each location. The Company has operated from its Taiyuan location since 1995 and from its Gujiao facility since it was acquired in January 2009.  The Company began to operate and generate revenues from its Gujiao location in November, 2009, commencing full operations in January, 2010. The Company is 1 of 3 licensed intermediaries in Taiyuan and the sole licensed intermediary in Gujiao that operates its own large scale storage tanks.  The Company is 1 of 17 licensed intermediaries in Shanxi.  The Company’s storage tanks have the largest storage capacity of any private enterprise in Shanxi.  Both facilities are strategically located in close proximity to the Company’s largest customers to ensure timely delivery of products.  The Company maintains significant inventory on-hand to meet its customers’ demands.

The Company has its own enterprise resource planning (ERP) computer system that manages and monitors the inflow and outflow of the products at its locations.  The Company uses this system to monitor and manage facility inventory levels for its day-to-day operations.
 
Taiyuan, Shanxi

 
The Company’s headquarters are located at its fuel depot storage facility in Taiyuan.  This facility has a total of 8 storage tanks with a capacity to store approximately 50,000 metric tons of Products (approximately 18 million gallons).  We maintain delivery and distribution platforms, including a dedicated rail spur and a vehicle loading and unloading fuel depot station at this facility.  We also maintain a retail outlet at this location.  The Company owns and maintains all assets at this facility.  The product sales revenue contribution from the Taiyuan facility for the years ended June 30, 2012 and 2011 were $256.3 million and $269.9 million, respectively.  All of our product sales revenue earned prior to the year ended June 30, 2009 were earned at this facility, which began operations in 1995.
 

Gujiao, Shanxi

In July, 2007, the Company made an initial deposit of approximately $9.2 million on a $30.0 million purchase contract with Shanxi Heitan Zhingyou Petrochemical Co., Ltd. for a second facility in Gujiao.  The Company acquired control of the facility in January 2009 and began operations in November 2009.  The Company retrofitted the existing storage tanks and built a new office and customer service center at the location.  The Gujiao Facility has a total of 8 storage tanks with a capacity to store approximately 70,000 metric tons of Products (approximately 25 million gallons). We also have 4 tar storage tanks with a capacity of 40,000 metric tons.  We maintain delivery and distribution platforms, including a dedicated rail spur and a vehicle loading and unloading station at this facility.  The Company owns and maintains all assets at this facility.  The product sales revenue contribution from Gujiao for the years ended June 30, 2012 and 2011 were $233.8 million and $188.2 million, respectively.  The Gujiao facility is located in an industrial region, approximately 30 kilometers north of Taiyuan.
 
 
Fanshi, Shanxi - Huajie Petroleum Assets (Proposed Acquisition)

 
In March 2011, the Company entered into a letter of intent to purchase the assets of Huajie Petroleum located in Xingyuan Township, Fanshi County in northern Shanxi Province.  The assets include fuel storage tanks with 100,000 metric ton capacity with accessory facilities and equipment, delivery and distribution platforms, including a dedicated rail spur and a vehicle loading and unloading station.  The purchase also includes a 3,000 square meter office building and land use rights for approximately 98 acres of land adjacent to the main regional rail line.  The Company has paid a deposit on the assets of RMB 550 million (approximately $87.1 million) through cash on hand.  The total purchase price is RMB 700 million (approximately $110.9 million).  The Huajie Petroleum assets are located in an industrial and mining region, approximately 200 kilometers to the north of Taiyuan.
 
Shanxi Market

The Company’s operations are concentrated in the central PRC, primarily Shanxi Province. Shanxi is the leading coal producing region in the PRC. The region is mountainous and has no oil reserves, pipelines or refineries within the province.  Therefore petroleum products have to be brought in from outside of the province via rail or truck, either from refineries in the neighboring provinces or from the relatively more numerous refineries in the coastal provinces of the northeast PRC. Consequently, it requires wholesale distributors to commit significant resources to transportation, logistics and storage.  The province is dependent on the timely delivery of petroleum products to support its growing industrial and consumer base.  Taiyuan and the outlying area have a population of approximately 5 million people and it is the capital of Shanxi Province.   Shanxi Province has a population of approximately 34 million and it is surrounded by large populated provinces, including the PRC capital city of Beijing, which represent a total population base of greater than 300 million people.  Taiyuan is approximately 500 km southwest of Beijing.  The GDP growth rate for Shanxi during 2011 was 13% according to the China Daily, March 13, 2012, and it is expected to outpace the general economic growth in the PRC for 2012.  The provincial government has estimated the fixed asset investment in Shanxi to be 5 trillion RMB (approximately $770 billion) over the next five years according to the China Daily, September 13, 2011.  The Company believes its location is advantageous to the growth of its business model.
 
 
 
Competitive Advantages
 
Although barriers to entry in our industry are high due to stringent licensing requirements and the need for significant storage capacity, we face competition from both state-owned and non-state-owned companies based in Shanxi Province and elsewhere that engage in the wholesale distribution of finished petroleum products. In addition to state-owned petroleum enterprises such as China Petroleum & Chemical Corporation, also known as “SINOPEC” and PetroChina Company Limited, there are currently 15 non-state-owned enterprises (including the Company) in Shanxi Province licensed to distribute finished oil products. Many of these non-state owned enterprises may have exclusive supply and purchase arrangements with suppliers as a result of long-term relationships.
 

We believe we have the following advantages over our competitors:
 
  
Mature operational infrastructure. During the past 17 years, we have built up our operational infrastructure, including extensive distribution channels, two petroleum storage depots and convenient access to strategic railway lines.
     
 
Stringent Licensing Requirements. All PRC enterprises engaging in the transportation, storage and wholesaling of petroleum products are required to obtain certain permits and licenses.  The permits and licenses are subject to periodic renewal and reassessment by the relevant government agencies. We also have the required permits and licenses to conduct our storage and wholesale distribution business, which are becoming increasingly difficult for new entrants to our industry to obtain due to the provincial government’s emphasis on consolidation and larger storage capacity by participants.
     
 
Established customer relationships. We have been in the wholesale finished oil business for 17 years operating in the same region on a direct sales relationship with our customers.  We focus on customer satisfaction and believe that we have consistently provided high quality products and services to our customers.  The key competitive advantages we offer to our customers is proximity for timely delivery and flexible customer service to meet their product volume demands.  We cannot offer significant discounts to our customers as the price of our products is primarily predetermined by market price and subject to regulatory retail price caps.  However, customers who purchase large quantities of Products may be given priority of supply in case of shortages.
     
 
Stable supply sources. We have good, long-term relationships with our refinery suppliers, some of which are private enterprises and some are large state-owned enterprises.  We also maintain significant advances on account with suppliers to ensure our own timely delivery and preferential pricing based on market movements.
     
 
Railway access. We benefit from our dedicated rail spurs that connect our storage depots to the main railway line to create efficient inflow and outflow of products.  Our rail spur loading facilities can process up to 8 tanker railcars at one time.  Our ERP system automatically measures all flow through our system and maintains our inventory accounting system.
     
 
Storage capacity. We have a total fuel depot storage capacity of 120,000 metric tons (approximately 43 million gallons of gasoline).  Aside from large upfront capital requirements, new entrants to this industry must also have significant storage capacity to be able to compete, which is a barrier to entry for new competitors.
 
Storage Capacity

The Company’s Products vary by product density; therefore the capacity will vary depending on the inventory product mix.  Below is a calculation based on the maximum capacity of each product individually as though it was the only product stored in inventory at our two existing facilities.
 
(1) 
Total Diesel Capacity –  37 million gallons (diesel density = 0.85kg/L)
(a) 
1,000kg x 1L/0.85kg = 1,176 L/mt
(b) 
1 US gallon = 3.7854 L
(c) 
1,176 L / 3.7854 = 310 gallons/mt
(d) 
120,000mt x 310 gallons = 37 million gallons diesel
 
(2) 
Total Gasoline Capacity – 43 million gallons (gasoline density = 0.74kg/L)
(a) 
1,000kg x 1L/0.74kg = 1,351 L/mt
(b) 
1 US gallon = 3.7854 L
(c) 
1,351 L / 3.7854 = 357 gallons/mt
(d) 
120,000mt x 357 gallons = 43 million gallons gasoline
 
(3) 
Fuel Oil Capacity – 35 million gallons (fuel oil density = 0.90kg/L)
(a) 
1,000kg x 1L/0.90kg = 1,111 L/mt
(b) 
1 US gallon = 3.7854 L
(c) 
1,111 L / 3.7854 = 294 gallons/mt
(d) 
120,000mt x 294 gallons = 35 million gallons fuel oil
 
(4) 
Solvent Capacity – mixture varies between gasoline and diesel, but assumes similar density to diesel

(5)
Based on the additional capacity from the proposed acquisition of 100,000mt, on a pro forma basis the Company would have 220,000mt (or the equivalent of 73 million gallons of petroleum) total capacity based on the current inventory allocation.
 
 
Below are the product levels of inventory for the years ended June 30, 2012 and 2011, respectively.  The product levels are listed in metric tons, US gallon equivalents and $USD value:
 
Inventory Level as of June 30, 2012
 
Product Inventory
 
Metric Tons (mt)
 
US Gallons (Millions)
 
($USD Millions)
 
Diesel
 
  26,254mt
 
  8.1M gallons
  $ 26.4M  
Gasoline
 
  22,618mt
 
  8.1M gallons
  $ 25.4M  
Fuel Oil
 
      400mt
 
  0.1M gallons
  $ 0.2M  
Solvents
 
   1,133mt
 
  0.3M gallons
  $ 0.6M  
TOTAL INVENTORY
 
50,405mt
 
16.6M gallons
  $ 52.6M  

Based on the year end June 30, 2012 inventory product mix the Company held 50,405mt of product on-hand valued at $52.6 million or approximately 42.0% of our total capacity of 120,000mt.
 
Inventory Level as of June 30, 2011
 
Product Inventory
 
Metric Tons (mt)
 
US Gallons (Millions)
 
($USD Millions)
 
Diesel
 
27,167mt
 
  8.4M gallons
  $ 26.8M  
Gasoline
 
23,533mt
 
  8.4M gallons
  $ 23.9M  
Fuel Oil
 
     460mt
 
  0.1M gallons
  $ 0.3M  
Solvents
 
     830mt
 
  0.3M gallons
  $ 0.5M  
TOTAL INVENTORY
 
51,990mt
 
17.2M gallons
  $ 51.5M  

Based on the year end June 30, 2011 inventory product mix the Company held 51,990mt of product on-hand valued at $51.5 million or approximately 43.3% of our total capacity of 120,000mt.
 
The Company’s storage capacity allows management to adjust inventory levels based on the anticipated movement of industry pricing and acts as a hedge on pricing levels.  Utilizing our excess storage capacity allows us flexibility to take advantage of pricing, supply and demand fluctuations within the marketplace.  Shanxi Province has no pipelines or refineries in the province.  All petroleum products are imported to Shanxi from other provinces within the PRC, typically via rail tanker cars.  The Company’s supplier advance balance with refineries allows us to lock-in availability of supply, and in certain instances pricing, so that we can react quickly to purchases based on the timing of the PRC pricing levels adjustments.

The Company’s inventory turnover for the years ended June 30, 2012 and 2011 was approximately 45 days and 41 days, respectively, to account for additional product purchases for on-hand inventory during a period of rising prices to take advantage of our large storage capacity.  The Company is continually working to optimize its inventory turnover, which expands sales capacity based on increased inventory movement.  In times of anticipated rising prices the Company tries to lock-in pricing and increase inventory on-hand prior to the PRC pricing mechanism adjusting the set retail price upwards.

The retail prices of gasoline and diesel, or finished oil sold in the PRC, are subject to the government guiding ceiling price.  In order to link domestic oil prices more closely to changes in the global crude oil prices in a controlled manner, the Administrative Measures on Oil Prices promulgated by the National Development and Reform Commission (“NDRC”) in the PRC on May 7, 2009 stipulates that the NDRC will adjust domestic finished oil prices when the international market price for a basket of crude oil, including Brent, Dubai and Indonesia’s Cinta, changes more than 4.0% over 22 consecutive business days.  The NDRC adjusts domestic finished oil prices by modifying the retail price for gasoline and diesel in all provinces, which has an upstream pricing effect over the wholesale of finished oil products.  Detail of the price adjustments during the years ended June 30, 2012 and 2011 are as follows:

Retail Price Adjustments as set by the NDRC per metric ton:

NDRC Retail Price
 
Gasoline Price per mt
 
Inc. (Dec.)
   
Diesel Price per mt
 
Inc. (Dec.)
 
Adjustment Date
 
RMB
   
$USD
 
RMB
 
%
   
RMB
   
$USD
 
RMB
 
%
 
June 30, 2010 - FYE
   
7,990
   
$
1,177
 
Annual
   
6.1%
     
7,260
   
$
1,069
 
Annual
   
6.9%
 
October 26, 2010
   
8,220
   
$
1,237
 
+230
   
2.9%
     
7,480
   
$
1,125
 
+220
   
3.0%
 
December 22, 2010
   
8,530
   
$
1,283
 
+310
   
3.8%
     
7,780
   
$
1,170
 
+300
   
4.0%
 
February 20, 2011
   
8,880
   
$
1,353
 
+350
   
4.1%
     
8,130
   
$
1,238
 
+350
   
4.5%
 
April 7, 2011
   
9,380
   
$
1,436
 
+500
   
5.6%
     
8,530
   
$
1,306
 
+400
   
4.9%
 
June 30, 2011 - FYE
   
9,380
   
$
1,451
 
Annual
   
17.4%
     
8,530
   
$
1,320
 
Annual
   
17.5%
 
October 9, 2011
   
9,080
   
$
1,432
 
-300
   
(3.2%
)
   
8,230
   
$
1,298
 
-300
   
(3.5%
)
February 8, 2012
   
9,380
   
$
1,491
 
  +300
   
3.3%
     
8,530
   
$
1,356
 
  +300
   
3.6%
 
March 20, 2012
   
9,980
   
$
1,581
 
+600
   
6.4%
     
9,130
   
$
1,446
 
+600
   
7.0%
 
May 10, 2012
   
9,650
   
$
1,531
 
-330
   
(3.3%
)
   
8,820
   
$
1,399
 
-310
   
(3.4%
)
June 9, 2012
   
9,120
   
$
1,443
 
-530
   
(5.5%
)
   
8,310
   
$
1,315
 
-510
   
(5.8%
)
June 30, 2012 - FYE
   
9,120
   
$
1,444
 
Annual
   
(2.8%
)
   
8,310
   
$
1,316
 
Annual
   
(2.6%
)
July 11, 2012
   
8,700
   
$
1,379
 
   -420
   
(4.6%
)
   
7,910
   
$
1,254
 
 -400
   
(4.8%
)
August 9, 2012
   
9,090
   
$
1,438
 
+390
   
4.5%
     
8,280
   
$
1,310
 
+370
   
4.7%
 
 
 
$USD equivalent price per metric ton is based on the exchange rate at the effective date of the retail price adjustment or year end.  Over the past fiscal year ended June 30, 2012 there have been two retail price increases and three retail price decreases representing an approximate 2.8% net price decrease in gasoline and 2.6% net price decrease in diesel retail prices.  Over the past two fiscal years ended June 30, 2012 and 2011, there have been a total of six retail price increases and three retail price decreases representing a cumulative approximate 14.1% net price increase in gasoline and 14.5% net price increase in diesel retail prices over the twenty-four month period.  This approximates to the price increase of 15.7% and 25.7% in Brent crude oil prices during the twelve and twenty-four month periods ended June 30, 2012, respectively.

Based on the metric ton retail price of gasoline at year-end June 30, 2012, the consumer price at the pump was approximately $1.07/liter (or $4.05/gallon) for gasoline and $1.12/liter (or $4.25/gallon) for diesel.  Based on the metric ton retail price of gasoline at year-end June 30, 2011, the consumer price at the pump was approximately $1.03/liter (or $3.91/gallon) for gasoline and $1.14/liter (or $4.30/gallon) for diesel.

The above PRC retail price control increase and decrease reflects the fluctuations in global crude oil prices.  As a result, the weighted average wholesale price of our products for the years ended June 30, 2012 and 2011 were $1,201/mt and $1,019/mt, respectively.

Operating Licenses

The Company holds two distinct licenses for the wholesale distribution of petroleum products in the PRC.  The Certificate for Wholesale Distribution of Finished Oil (the “FO License”) is a license granted by the PRC central government.  The FO License allows us to sell our products to wholesale customers and other users of gasoline, diesel and solvents.  The FO License must be renewed every 5 years.  Our most recent renewal process extends our license from April 13, 2011 through April 13, 2016.  We hold this license at the discretion of the PRC government.  We also hold a Dangerous Chemical Distribution License (the “DCD License”) that allows us and our personnel to handle and transport gasoline and diesel oil. The DCD License must be renewed every 3 years. We are currently in the renewal process and the new license will extend until 2015.  The Constitution of the PRC states that all mineral and oil resources belong to the State.  Therefore, without these licenses, we would not be able to transport and sell our products.
 
In addition to business licenses issued by the Municipal Administration for Industry and Commerce, our two retail gas stations, one at each of our storage facility locations, hold a renewable Operating License for Hazardous Chemicals and a renewable Operating License for Retail Sale of Finished Oil that allows us to sell at retail gasoline, diesel and solvents. Both licenses are subject to annual inspections - the Hazardous Chemical License by the provincial Administration of Work Safety and the Retail License by the provincial Department of Commerce - and failure to pass the annual inspection may lead to their revocations.
 
Suppliers

The Company purchases diesel, gasoline, fuel oil, solvents, kerosene and other additives directly from a limited number of refineries located mostly in the eastern and northwestern regions of the PRC.  The primary products purchased are gasoline, #90 and #93 grades, and diesel #10.  The Company has long-term, established relationships with these suppliers.  The Company’s advances to suppliers account represents cash paid in advance for purchases of inventory from suppliers.  The Company locks in availability and pricing with suppliers in advance by using the Company’s cash resources.  The Company expects to maintain supplier advances in the future to ensure that the Company has access to adequate supplies and timely shipments to act as a hedge based on the movement of industry pricing. The deposits are held by the Company’s refinery suppliers to ensure that the delivery of inventory to the Company is made in a timely manner. The Company attempts to maintain a significant balance on account with the refineries with the expectation of receiving preferential pricing and delivery.  The Company does not foresee any potential loss with regard to these advances as a result of the suppliers being large enterprises that have significant controls placed upon them by PRC regulation.  The Company has not had to make any historical adjustments to these accounts for any deficiencies or negative impact related to the Company’s suppliers.

Below is a list of suppliers that represented more than 10% of our purchases in years ended June 30, 2012 and 2011:
 
Supplier/Refinery Purchases > 10% of Total Annual Purchase
 
   
For the Year Ended
 
Suppliers
 
June 30, 2012
   
June 30, 2011
 
Yan Lian Industrial Group
    19.3 %     18.2 %
Tianjin Dagang Jinyu Industrial Co., Ltd.
    16.7 %     14.8 %
Panjin Jinjiang Oil Company
    16.2 %     18.6 %
Guangzhou Tenghao Company
    14.7 %     16.1 %
Jinan Blue Star Petroleum Co.
    13.9 %     15.3 %
TOTAL
    80.8 %     83.0 %
 
 
China’s top two refiners are Sinopec and PetroChina, which supply the majority of gasoline, diesel and other petroleum products in the PRC.  Independent refineries, also known as teapot refineries, collectively account for approximately 1.8 million barrels/day (“b/d”) of production capacity (or approximately 20% of China’s total refining capacity).  Refinery capacity in the PRC is expected to continue to grow from 8.6 million b/d in 2009 to 10.1 million b/d in 2015 to 11.5 million b/d in 2020, according to the Business Monitor International, China Oil and Gas Report (BMI).

Longwei’s suppliers are considered to be some of the largest of these refiners, which are typically state-owned refineries outside of the Sinopec/PetroChina supply hierarchy.  While we are dependent on these suppliers for our finished petroleum products, we are always seeking to expand our supply sources and believe that we can find alternative suppliers with comparable terms within a reasonable amount of time without any significant disruption in our operations.  Since inception, we have not experienced any difficulty in obtaining refined products in a timely manner.

Supplier Risks

The Company depends on suppliers, namely refineries, for inventory. The cost of inventory may fluctuate substantially and it is possible that our demand for inventory could not be met due to short supply, may be available from only one or a limited number of suppliers, or may only be available from foreign suppliers. Increased costs or difficulties in obtaining inventory in the requisite quantities, or at all, could have a material adverse effect on our results of operations. The credit crisis and rapidly escalating raw material costs across a variety of industries created additional risks for our supplier base. In the year ending June 30, 2013, the Company’s suppliers could face financial difficulties as a result of the global economic downturn. We actively monitor our suppliers' financial condition, and to date we have no knowledge of significant concerns with the financial stability of any of our major suppliers.
 
We are dependent upon the ability of refinery suppliers to meet product specifications, standards and delivery schedules at anticipated costs. While we maintain a qualification and performance surveillance system to control risk associated with this reliance on third parties, the failure of suppliers to meet commitments could adversely affect delivery schedules and profitability, while jeopardizing our ability to fulfill commitments to customers.
 
Research and Development

The Company expenses the cost of research and development as incurred.  Research and development costs for the years ended June 30, 2012 and 2011 were not significant.
 
Intellectual Property

The Company currently does not own any intellectual properties.  We do however hold two primary licenses: (1) Wholesale Distribution of Finished Oil License, and (2) Dangerous Chemical Distribution License.  These two licenses were initially obtained when we began operations in 1995.  These licenses do not appear on our balance sheets within the consolidated financial statements.  However, the FO License has a renewable 5 year term and the DCD License has a renewable 3 year term.  We consider these licenses to be extremely valuable and believe our operations would be severely impacted if these licenses were not adequately maintained.

Industry

Our operations are in Shanxi Province, which is a center of industrial operations and energy supply within the PRC.  We believe our Taiyuan facility is well positioned to continue revenue growth within the metropolitan area of Taiyuan.  The Gujiao facility is located within a dense industrial geography and is expected to continue to generate strong revenue growth going forward.  The two facilities have a combined storage capacity of 120,000mt.  We are under contract to purchase the assets of a third facility in northern Shanxi Province, Huajie Petroleum, which would expand our total storage capacity to 220,000mt.

The development of Central China has become the focus of the PRC’s economic growth plan amid the slowly recovering global economy and the slower general GDP expansion, with key industries such as agriculture, energy and machinery being promoted by the government.  The GDP growth rate for Shanxi Province during 2011 was 13% according to the China Daily, March 13, 2012, and it is expected to outpace the general economic growth in the PRC for 2012.

The PRC is the world’s second largest consumer of petroleum products behind the United States, according to www.platts.com.  The Business Monitor International, China Oil and Gas Report (BMI) forecasts that the demand for gasoline and diesel, which is still relatively low on a per capita basis, has been on a steady increase and is projected to continue to grow in line with rising car ownership and industrial/agriculture production in the PRC.  According to BMI, China’s oil consumption will grow to 11.5 million barrels per day (b/d) by 2015 and 13.3 million b/d by 2020.  
 

We believe there are two key market trends according to the Institute for the Analysis of Global Security that allow for substantial growth in the PRC over the next three to five years:
 
1.  
Energy demand. Oil consumption in the PRC is growing at an annual rate of 7.5%.  The PRC is now the top global energy consumer and growing.  Over 20% of the PRC’s energy demand is satisfied by oil.  We are located in a province without pipelines or refineries that requires significant transportation logistics and storage, which can be facilitated by the Company.
   
2.  
Automobile ownership.  Automobiles in the PRC are expected to grow at an annual rate of 19%, and the PRC is now the largest new automobile market in the world.  From 1990 – 2010, 90 times more automobiles were on the road in the PRC, and by 2030 the PRC is expected to have as many automobiles on the road as the US.  The Company has good supplier relationships with many of the major gasoline retailers in Shanxi.

Business Strategy

Internal Growth

The Company seeks organic growth by growing with our existing customer base and expanding our sales using our direct sales force and customer referrals.  We continue to seek expansion of our customer base within Shanxi Province, and are focused on the development of our industrial customer base at the Gujiao Facility.  We also seek to continue to improve our inventory turnover.

Geographic Growth

The Company will continue to seek out additional facilities with the intention of acquiring facilities in the future that are accretive to earnings with a short payback period on investment. Future potential acquisitions will be contemplated by our management with the knowledge and understanding we have gained from operations and business development work completed at both the Taiyuan and Gujiao facilities.  In general, we intend to review potential acquisitions of facilities that we believe will generate profits over the initial 3 year term for us that equals or exceeds the total purchase price of a new facility.  We are currently under a contract to purchase the assets of Huajie Petroleum.  The proposed assets will increase our storage capacity by an additional 100,000mt.  The Company has paid a deposit for the assets of RMB 550 million (approximately $87.1 million) through cash on hand.  The total purchase price is RMB 700 million (approximately $110.9 million).  The Huajie Petroleum assets are located in an industrial and mining region, approximately 200 kilometers to the north of our Taiyuan facility.
 
Government Regulations

Finished Oil Distribution

Prior to 2006, significant gaps existed in the laws and regulations pertaining to the finished oil industry, and the relevant rules for this industry were, to some extent, inconsistent and subject to the discretion of the relevant government authorities.

In 2006, greater specificity was added to the rules for commercial activities in the finished oil industry with the enactment of the Measures on the Administration of the Finished Oil Market (promulgated on December 4, 2006 by the PRC Ministry of Commerce (“MOFCOM”) and effective as of January 1, 2007, (the “Measures”). This regulation provides comprehensive details on the finished oil wholesale and resale application procedures, qualification requirements, and rules for annual inspections. Enterprises (foreign or domestic-funded) meeting certain requirements can submit applications to the MOFCOM for a certificate of approval to conduct gasoline and diesel (including bio-diesel) wholesale, retail and storage businesses.

The first step required in applying to engage in the wholesale of finished oil is a preliminary examination by the provincial MOFCOM where the enterprise is located. Thereafter, the provincial MOFCOM will forward the application materials together with its opinions on the preliminary examination to the MOFCOM, which will then decide on whether to grant the Certificate of Approval for the Wholesale of Finished Oil.

An enterprise applying to engage in the finished oil wholesale business must, among other requirements, possess the following:
 
 
(i)
long-term and stable supply of finished oil;
 
 
(ii)
a legal entity with a registered capital of no less than RMB 30 million;
 
 
(iii)
a finished oil depot, which shall have a capacity not smaller than 10,000 m3 (cubic meters), conforming to the local urban and rural planning requirements, and be approved by other relevant administrative departments (1 cubic meter is the equivalent of 1 metric ton of water at 4° Celsius); and
 
 
(iv)
Facilities for unloading finished oil such as conduit pipes, special railway lines, and transportation vehicles with a capacity of 10,000 metric tons or more to transport refined oil via rail, on the highway or over water to ports.
 
 
The application procedure for the retail of finished oil is similar to that for wholesale except that the preliminary examination takes place at the administrative department for commerce at the municipal level, and the certificate of approval is issued at the provincial level.

An enterprise applying to engage in the finished oil retail business must, among other requirements, possess the following:
 
 
(i)
long-term and stable channels to finished oil supply and a supply agreement with an enterprise that has been qualified to engage in the wholesale business of finished oil for a period of three years or more in line with its business scale;
 
 
(ii)
qualified professional and technical personnel to handle inspections, metrology, storage and fire safety and the safe production of finished oil; and
 
 
(iii)
gas stations designed and built to comply with the relevant national standards and approved by the relevant administrative department.
 
Enterprises possessing certificates of approval are subject to annual inspection by the relevant provincial MOFCOM which will review:
 
 
(i)
the execution and performance of finished oil supply agreements;
 
 
(ii)
the operation results of the enterprise for the previous year;
 
 
(iii)
whether the enterprise and its supporting facilities are in compliance with the technical requirements under the Measures; and
 
 
(iv)
The current measures, among other measures, being taken by the enterprise regarding quality control, metrology, fire safety, security and environmental protection.
 
When we pass the annual inspection, the certificates of approval we hold continue to be valid. An enterprise failing an annual inspection will be ordered to rectify all deficiencies within a certain time limit by the MOFCOM and/or its provincial branches. If such deficiencies have not been rectified within the specified time limit, its certificates of approval shall be revoked by the original issuing authority.

We currently are in full compliance with the Measures, and hold valid operating licenses to conduct our businesses. However, we cannot provide assurance that we will not fail to satisfy the above mentioned requirements in the future.

Pricing for Finished Oil

The PRC National Development and Reform Commission (“NDRC”) regulates domestic oil prices as part of its macro-management over the economy in order to control dramatic fluctuations in oil prices.

The Administrative Measures on Oil Prices ( trial implementation ), or the Price Measures, promulgated by the NDRC on May 7, 2009 stipulates that the NDRC will adjust domestic finished oil prices when the international market price for crude oil changes more than 4% over 22 consecutive working days. By contrast, crude oil prices are determined solely by enterprises engaging in this industry.

The NDRC adjusts domestic finished oil prices by modifying the retail price cap for gasoline and diesel in all provinces, autonomous regions, and directly administered municipalities. Thereafter, the administrative authorities at the provincial level adjust the wholesale price caps from the corresponding retail price caps. Where there are no specific contractual arrangements for a supplier’s delivery to a retailer, the wholesale price caps may be further deducted to take into account the retailer’s transportation cost among other expenses.

The Price Measures stipulate that the domestic finished oil prices shall be calculated according to the normal profit rate for refiners when the crude oil price on the international market is lower than $80 per barrel. When the international crude oil market price exceeds $130 per barrel, the NDRC will adopt certain fiscal and tax policies to ensure the continuing production and supply of refined oil products. Further, gasoline and diesel prices will only be increased slightly (if at all) in consideration of manufacturers and consumers, as well as the stability of the national economy.

The exact formula for calculating finished oil prices domestically has not been published. However, the NDRC has stated that such formula is based on the weighted average of the international market prices, together with the average domestic processing costs, taxes, fees incurred in distribution channels, and suitable profits for refiners. Moreover, the NDRC adjusts the cost index seasonally in accordance with the actual situation with respect to prices.
 

Environmental Protection

The relevant PRC governmental authorities set national and local environmental protection standards, as well as examine and issue approvals on environmental aspects of different stages of various projects. We are required to file an environmental impact statement, or in some cases, an environmental impact assessment outline, to obtain such approvals. The filing must demonstrate that the project in question conforms to applicable environmental standards. Generally speaking, environmental protection bureaus will issue approvals and permits for projects using modern pollution control measurement technology.

The PRC national and local environmental laws and regulations impose fees for the discharge of waste substances above prescribed levels, require the payment of fines for serious violations and provide that the PRC national and local governments may, at their own discretion, close or suspend any facility which fails to comply with orders requiring it to cease or improve operations causing environmental damage.

In accordance with the requirements of the environmental protection laws of the PRC, we have installed the necessary environmental protection equipment, adopted advanced environmental protection technologies, established responsibility systems for environmental protection, and reported to and registered with the relevant local environmental protection department.

Dangerous Chemicals

PRC laws and regulations on dangerous chemicals require that a Dangerous Chemical Distribution License, or the DCD License, be obtained for all companies that handle and transport dangerous chemicals.

Foreign-invested Enterprises Engaging in Oil-related Businesses

Under the Catalogue of Industries for Guiding Foreign Investment, jointly promulgated by the MOFCOM and the NDRC on October 31, 2007 and effective as of December 1, 2007, each of the following falls within the restricted category for foreign investment: wholesale of oil products, the construction and operation of gas stations, and the production of liquid bio-fuels (i.e., fuel ethanol, biodiesel). Foreign investors can only engage in commercial activities involving liquid bio-fuels or retail distribution of finished oil (where the foreign investor possesses 30 or more gas stations or where it sells different brands of oil through different distributors) through a joint venture with a Chinese partner, and the Chinese partner must hold a controlling interest in the joint venture. As a result of these restrictions, all of our business operations are conducted by a domestic entity, Taiyuan Longwei Economy & Trading Co., Ltd.
 
Corporate Structure

The Company began operations in July 1995 in the PRC.  We were incorporated under the laws of the State of Colorado on March 17, 2000 as Tabatha II, Inc.  On October 12, 2007, we changed our name to Longwei Petroleum Investment Holding Limited. On October 16, 2007, we entered into a Share Exchange Agreement and issued 69,000,000 shares of our common stock in exchange for 100% of the outstanding ownership units of Longwei Petroleum Investment Holding Limited (Longwei BVI), a British Virgin Islands entity.  This transaction was accounted for as a reverse acquisition. Longwei Petroleum Investment Holding Limited, formerly known as Tabatha II, Inc., did not have any operations and majority-voting control was transferred to the previous owners of Longwei BVI.  The transaction required a recapitalization of Longwei BVI. Since Longwei BVI acquired a controlling voting interest, it was deemed the accounting acquirer, while Longwei Petroleum Investment Holding Limited (formerly Tabatha II, Inc.) was deemed the legal acquirer.
 
Inflation

Inflationary factors such as increases in the cost of our Product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.

Foreign Currency Translation Adjustment
 
Our operating subsidiaries purchase all products and render services in the PRC, and receive payment from customers in the PRC using RMB as the functional currency.  All of our customers and suppliers are located in the PRC. While our reporting currency is the U.S. Dollar, all of our consolidated revenues and the majority of consolidated operating costs and expenses are denominated in RMB. Substantially all of our assets and liabilities are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. Dollars and RMB. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

We incurred a foreign currency translation adjustment increase of $6,597,958 for the year ended June 30, 2012, as compared with the foreign currency translation adjustment increase of $12,983,503 for the year ended June 30, 2011.   On July 21, 2005, China reformed its foreign currency exchange policy, revalued the RMB by 2.1 percent and allowed the RMB to appreciate as much as 0.3 percent per day against the U.S. dollar. We implemented exchange rates in translating RMB into U.S. dollars in our financial statements for years ended June 30, 2012 and 2011, respectively.  Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates for the periods presented and shareholders’ equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign currency translation adjustment to other comprehensive income, a component of stockholders’ equity.  If the RMB appreciates against the U.S. dollar, revenue and expenses would be higher than they would have been if there were no fluctuations in the currencies.  Conversely, if the RMB depreciates against the U.S. dollar, revenue and expenses would be lower than they would have been if there were no fluctuations in the currencies.
 
 
Taxation, Fees and Royalties
 
Companies which operate petroleum and petrochemical businesses in China are subject to a variety of taxes, fees and royalties.  Since January 1, 2008, the general enterprise income tax rate imposed on entities, other than certain enterprises defined in the new Enterprise Income Tax Law of the PRC, has been 25%.
 
Seasonality

Our business is relatively stable and predictable and is not subject to changes in seasonality.

Employees

We currently have 77 full-time employees, including our managers and officers. We do not have any part-time employees.  We expect that additional sales and material handling personnel will be required as the business expands.  Our employees are interviewed and hired by our human resource department. We believe that our relationship with our employees is good.  Management expects that our access to reasonably priced and competent labor will continue into the foreseeable future.  Our employees are not represented by any union.
 
Environmental Matters

We believe that we are in compliance with present environmental protection requirements in all material respects. Our distribution processes generate noise, waste water, gaseous wastes, petrochemical wastes, and other industrial wastes. We have installed various types of anti-pollution equipment in our facilities to reduce, treat, and where feasible, recycle the wastes generated in our business. Our operations are subject to regulation and periodic monitoring by local environmental protection authorities.

Corporate Information

Our principal executive office is No. 30 Dajingyu Avenue, Wan Bailin District, Taiyuan City, Shanxi Province, China, PC 030024.  Our main telephone number is (1) 727-641-1357 and our facsimile number is (1) 727-231-0944.  Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through the Securities and Exchange Commission (“SEC”) website at http://www.sec.gov as soon as reasonably practicable after those reports are electronically filed with or furnished to the SEC.


RISK FACTORS

You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to the Company’s securities. The statements contained in or incorporated into this annual report that are not historic facts are forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward looking statements. If any of the following risks actually occurs, the Company’s business, financial condition or results of operations could be harmed. In that case, the trading price of the Company’s common stock could decline, and you may lose all or part of your investment.
 
Risks Related to Business Operations
 
We may be unable to manage our growth.
 
We are planning for rapid growth and intend to aggressively expand operations. The growth in the size and geographic range of our business will place significant demands on management and our operating systems. Our ability to manage growth effectively will depend on our ability to attract additional management personnel; to develop and improve operating systems; to hire, train, and manage an employee base; and to maintain adequate service capacity. Additionally, the proposed expansion of operations may require hiring additional management personnel to oversee procurement duties. We will also be required to rapidly expand operating systems and processes in order to support the projected increase in product demand. There can be no assurance that we will be able to effectively manage growth and build the infrastructure necessary to achieve growth as management has forecasted.
 
 
The strategy of acquiring complementary businesses and assets may fail which could reduce our ability to compete for customers.
 
As part of our business strategy, we have pursued, and intend to continue to pursue, selective strategic acquisitions of businesses, assets and technologies that complement our existing business. We intend to make other acquisitions in the future if suitable opportunities arise. Acquisitions involve uncertainties and risks, including:

 
potential ongoing financial obligations and unforeseen or hidden liabilities;
 
failure to achieve the intended objectives, benefits or revenue-enhancing opportunities;
 
costs and difficulties of integrating acquired businesses and managing a larger business; and
 
diversion of resources and management attention.
 
The failure to address these risks successfully may have a material adverse effect on our financial condition and results of operations. Any such acquisition may require a significant amount of capital investment, which would decrease the amount of cash available for working capital or capital expenditures. In addition, if we use our equity securities to pay for acquisitions, we may dilute the value of your shares. If we borrow funds to finance acquisitions, such debt instruments may contain restrictive covenants that could, among other things, restrict us from distributing dividends. Such acquisitions may also generate significant amortization expense related to intangible assets.
 
We depend on our key executives, and our business and growth may be severely disrupted if we lose their services.

Our future success depends substantially on the continued services of our key executives. In particular, we are highly dependent upon Mr. Cai Yongjun, our chairman and chief executive officer, who has established relationships within the industries we operate. If we lose the services of one or more of our current management, we may not be able to replace them readily, if at all, with suitable or qualified candidates, and may incur additional expenses to recruit and retain new officers with industry experience similar to our current officers, which could severely disrupt our business and growth. In addition, if any of our executives joins a competitor or forms a competing company, we may lose some of our suppliers or customers. Furthermore, as we expect to continue to expand our operations, we will need to continue attracting and retaining experienced management and key research and development personnel.

Competition for qualified candidates could cause us to offer higher compensation and other benefits in order to attract and retain them, which could have a material adverse effect on our financial condition and results of operations. We may also be unable to attract or retain the personnel necessary to achieve our business objectives, and any failure in this regard could severely disrupt our business and growth.

The current economic and credit environment could have an adverse effect on demand for certain of our products and services, which would in turn have a negative impact on our results of operations, our cash flows, our financial condition, our ability to borrow and our stock price.

Since late 2008, global market and economic conditions have been disrupted and volatile. Concerns over increased energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining residential real estate market in the U.S. have contributed to this increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated a global recession.
 
It is difficult to predict how long the current economic conditions will persist, whether they will deteriorate further, and which of our products, if not all of them, will be adversely affected. As a result, these conditions could adversely affect our financial condition and results of operations.

Our business will suffer if we cannot obtain, maintain or renew necessary permits or licenses.

All PRC enterprises engaging in the sale of finished oil products are required to obtain from various PRC governmental authorities certain permits and licenses, including, without limitation, the Certificate for Wholesale Distribution of Finished Oil and the Dangerous Chemical Distribution License. We have obtained permits and licenses required for the distribution of finished oil. Failure to obtain all necessary approvals/permits may subject us to various penalties, such as fines or being required to vacate from the facilities where we currently operate our business.

These permits and licenses are subject to periodic renewal and/or reassessment by the relevant PRC government authorities and the standards of compliance required in relation thereto may from time to time be subject to change. We intend to apply for renewal and/or reassessment of such permits and licenses when required by applicable laws and regulations, however, we cannot assure you that we can obtain, maintain or renew the permits and licenses or accomplish the reassessment of such permits and licenses in a timely manner. Any changes in compliance standards, or any new laws or regulations that may prohibit or render it more restrictive for us to conduct our business or increase our compliance costs may adversely affect our operations or profitability. Any failure by us to obtain, maintain or renew the licenses permits and approvals may have a material adverse effect on the operation of our business. In addition, we may not be able to carry on business without such permits and licenses being renewed and/or reassessed.
 
 
Power shortages, natural disasters, terrorist acts or other events could disrupt our operations and have a material adverse effect on our business, financial position or results of operations.

Our business could be materially and adversely affected by power shortages, natural disasters, terrorist attacks or other disruptive events in the PRC. For example, in early 2008, parts of the PRC were affected by severe snow storms that significantly impacted public transportation systems and the power supply in those areas. In May 2008, Sichuan Province in the PRC suffered a strong earthquake measuring approximately 8.0 on the Richter scale that caused widespread damage and casualties. The May 2008 Sichuan earthquake had a material adverse effect on the general economic conditions in the areas affected by the earthquake and severely affected the transportation systems in those areas. Any future natural disasters, terrorist attacks or other disruptive events in the PRC could cause a reduction in usage of or other severe disruptions to, public transportation systems and could have a material adverse effect on our business, financial position or results of operations.

If we require additional financing, we may not be able to find such financing on satisfactory terms or at all.

Our capital requirements may be accelerated as a result of many factors, including timing of development activities, underestimates of budget items, unanticipated expenses or capital expenditures, future product opportunities with collaborators and future business combinations. Consequently, we may need to seek additional debt or equity financing, which may not be available on favorable terms, if at all, and which may be dilutive to our stockholders. To the extent we raise additional capital by issuing equity securities, our stockholders may experience dilution. To the extent that we raise additional capital by issuing debt securities, we may incur substantial interest obligations, may be required to pledge assets as security for the debt and may be constrained by restrictive financial and/or operational covenants. Debt financing would also be superior to our stockholders’ interest in bankruptcy or liquidation.
 
Our operating results may fluctuate, which makes our results difficult to predict and could cause our results to fall short of expectations.

We currently consume a large amount of refined diesel and gasoline. While we try to adjust the sales price of the products to track international crude oil price fluctuations, our ability to pass on the increased cost resulting in diesel and gasoline price increases to our customers is dependent on international and domestic market conditions as well as the PRC government’s price control over refined petroleum products. For example, the international crude oil price reached its historically high level in July 2008, but we were not able to effectively pass the increased cost to our customers. Although the current price-setting mechanism for refined petroleum products in China allows the PRC government to adjust price in the PRC market when the average international crude oil price fluctuates beyond certain levels within a certain time period, the PRC government still retains discretion as to whether or when to adjust the refined petroleum products price. The PRC government will exercise certain price controls over refined petroleum products once international crude oil price experiences sustained growth or becomes significantly volatile. As a result, our results of operations and financial condition may be materially and adversely affected by the fluctuation of crude oil and refined petroleum product prices. Our operating results may fluctuate as a result of a number of factors, many of which are outside of our control, such as the price of crude oil. For these reasons, comparing operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of future performance. Quarterly and annual revenues, costs and expenses as a percentage of our revenues may be significantly different from our historical or projected rates. Operating results in future quarters may fall below expectations. Any of these events could cause the price of our common stock to fall.
 
We rely heavily on outside suppliers for products derived from crude oil and other raw materials, and may even experience disruption of our ability to obtain products refined from crude oil and other raw materials.
 
We purchase a significant portion of our products from outside suppliers located in different provinces within the PRC. We are also aware that a large portion of our products originated in other countries.  We are subject to the political, geographical and economic risks associated with these other provinces and perhaps even the countries where the products have originated. If one or more of our material supply contracts were terminated or disrupted due to any natural disasters or political events, it is possible that we would not be able to find sufficient alternative sources of supply in a timely manner or on commercially reasonable terms. As a result, our business and financial condition would be materially and adversely affected.
 
  
Our business faces operation risks and natural disasters that may cause significant property damages, personal injuries and interruption of operations, and we may not have sufficient insurance coverage for all potential financial losses incurred.
 
Transporting petroleum products involves a number of operating hazards.  Significant operating hazards and natural disasters may cause interruption to business operations, property or environmental damages as well as personal injuries, and each of these incidents could have a material adverse effect on our financial condition and results of operations.
 
We do not yet maintain insurance coverage on our property, plant, equipment and inventory. However, preventative measures such as insurance may not be effective in any event and if we should acquire insurance coverage it may not be sufficient to cover all the financial losses caused by operation risks and potential natural disasters, among other risks. Losses incurred or payments required to be made by us due to operating hazards or natural disasters, which are not fully insured, may have a material adverse effect on our financial condition and results of operations.

We are dependent on third parties to transport our products, so their failure to transport the products could adversely affect our earnings, sales and geographic market.
 
We use third parties for the vast majority of our shipping and transportation needs. If these parties fail to deliver products in a timely fashion, including lack of available trucks or drivers, labor stoppages or if there is an increase in transportation costs, including increased fuel costs, it would have a material adverse effect on our earnings and could reduce our sales and geographic market.
 
We have limited business insurance coverage and potential liabilities could exceed our ability to pay them.
 
The insurance industry in the PRC is still at an early stage of development. Insurance companies in the PRC offer limited business insurance products. We do not have any business liability or disruption insurance coverage for our operations in the PRC. Any business disruption, litigation or natural disaster may result in substantial costs and the diversion of our resources.
 
Risks Related to Corporate Governance and Common Stock

Our common stock is classified as a “penny stock” as that term is generally defined in the Securities Exchange Act of 1934 to mean equity securities with a price of less than $5.00.  Our common stock will be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock.
 
We are subject to the penny stock rules adopted by the Securities and Exchange Commission that require brokers to provide extensive disclosure to its customers prior to executing trades in penny stocks. These disclosure requirements may cause a reduction in the trading activity of our Common Stock, which in all likelihood would make it difficult for the Company’s stockholders to sell their securities.
 
Rule 3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a "penny stock," for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us. It is likely that our shares will be considered to be penny stocks for the immediately foreseeable future. This classification severely and adversely affects any market liquidity for our common stock.
 
For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person's account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased.  In order to approve a person's account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth:

 
the basis on which the broker or dealer made the suitability determination, and
 
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
 
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions.

Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
 
 
Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their shares in any secondary market and have the effect of reducing the level of trading activity in any secondary market. These additional sales practice and disclosure requirements could impede the sale of our common stock. In addition, the liquidity for our common stock may decrease, with a corresponding decrease in the price of our common stock. Our common stock is subject to such penny stock rules for the foreseeable future and our shareholders will, in all likelihood, find it difficult to sell their common stock.

The market for penny stock has experienced numerous frauds and abuses which could adversely impact subscribers of our stock.

We believe that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:
 
 
control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
 
manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
 
“boiler room" practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
 
excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
 
wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
 
We believe that many of these abuses have occurred with respect to the promotion of low price stock companies that lacked experienced management, adequate financial resources, an adequate business plan and/or marketable and successful business or product.

We are controlled by the officers and directors of the Company.
 
Our officers, directors and principal stockholders and their affiliates own or control a majority of our outstanding common stock. As a result, these stockholders, if acting together, would be able to effectively control matters requiring approval by our stockholders, including the election of our Board of Directors.
 
Our certificate of incorporation limits the liability of members of the Board of Directors.
 
Our certificate of incorporation limits the personal liability of the directors of the Company for monetary damages for breach of fiduciary duty as a director, subject to certain exceptions, to the fullest extent allowed. We are organized under Colorado law. Accordingly, except in limited circumstances, our directors will not be liable to our stockholders for breach of their fiduciary duties.
 
Provisions of our certificate of incorporation, bylaws and Colorado corporate law have anti-takeover effects.
 
Some provisions in our certificate of incorporation and bylaws could delay or prevent a change in control of us, even if that change might be beneficial to our stockholders. Our certificate of incorporation and bylaws contain provisions that might make acquiring control of us difficult, including provisions limiting rights to call special meetings of stockholders and regulating the ability of our stockholders to nominate directors for election at annual meetings of our stockholders. In addition, our board of directors has the authority, without further approval of our stockholders, to issue common stock having such rights, preferences and privileges as the board of directors may determine. Any such issuance of common stock could, under some circumstances, have the effect of delaying or preventing a change in control of us and might adversely affect the rights of holders of common stock.
 
In addition, we are subject to Colorado statutes regulating business combinations, takeovers and control share acquisitions, which might also hinder or delay a change in control of us. Anti-takeover provisions in our certificate of incorporation and bylaws, anti-takeover provisions that could be included in the common stock when issued and the Colorado statutes regulating business combinations, takeovers and control share acquisitions can depress the market price of our securities and can limit the stockholders’ ability to receive a premium on their shares by discouraging takeover and tender offer bids, even if such events could be viewed by our shareholders or others as beneficial transactions.
  
Our internal financial reporting procedures are still being developed. During the fiscal year ending June 30, 2013, the Company will need to allocate significant resources to meet applicable internal financial reporting standards.
 
We have adopted disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we submit under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are accumulated and communicated to management, including principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. We are taking steps to develop and adopt appropriate disclosure controls and procedures.
 
 
These efforts require significant time and resources. If we are unable to establish appropriate internal financial reporting controls and procedures, our reported financial information may be inaccurate and we will encounter difficulties in the audit or review of our consolidated financial statements by our independent auditors, which in turn may have material adverse effects on our ability to prepare consolidated financial statements in accordance with generally accepted accounting principles in the United States of America and to comply with SEC reporting obligations.
 
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes Oxley Act of 2002 could prevent us from producing reliable financial reports or identifying fraud. In addition, current and potential stockholders could lose confidence in our financial reporting, which could have an adverse effect on our stock price.
 
We are subject to Section 404 of the Sarbanes-Oxley Act of 2002. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud, and a lack of effective controls could preclude the Company from accomplishing these critical functions. We are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, in connection with, Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 5 (“AS 5”) which requires annual management assessments of the effectiveness of our internal controls over financial reporting.  Although we intend to augment our internal control procedures and expand our accounting staff, there is no guarantee that this effort will be adequate.
 
During the course of testing, we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404 and AS 5. In addition, if we fail to maintain the adequacy of our internal accounting controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. Failure to achieve and maintain effective internal controls could cause us to face regulatory action and also cause investors to lose confidence in our reported financial information, either of which could have an adverse effect on our stock price.
 
Shareholders may have difficulty trading and obtaining quotations for our common stock.
 
Our common stock may not be actively traded, and the bid and ask prices for our common stock on the NYSE MKT may fluctuate widely. As a result, shareholders may find it difficult to dispose of, or to obtain accurate quotations of the price of, our securities. This severely limits the liquidity of the common stock, and would likely reduce the market price of our common stock and hamper our ability to raise additional capital.
 
The market price of our common stock may, and is likely to continue to be, highly volatile and subject to wide fluctuations.

The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including:
 
 
dilution caused by the issuance of additional shares of common stock and other forms of equity securities in connection with future capital financings to fund business operations and growth, to attract and retain valuable personnel and in connection with future strategic partnerships with other companies;
 
announcements of new acquisitions or other business initiatives by the Company’s competitors;
 
our ability to take advantage of new acquisitions or other business initiatives;
 
fluctuations in revenue from our petroleum products;
 
changes in the market for petroleum products and/or in the capital markets generally;
 
changes in the demand for petroleum products, including changes resulting from the introduction or expansion of new petroleum products;
 
quarterly variations in our revenues and operating expenses;
 
changes in the valuation of similarly situated companies, both in our industry and in other industries;
 
changes in analysts’ estimates affecting us, our competitors and/or our industry;
 
changes in the accounting methods used in or otherwise affecting our industry;
 
additions and departures of key personnel;
 
announcements of technological innovations or new products available to our industry;
 
announcements by relevant governments pertaining to incentives for biodegradable product development programs;
 
fluctuations in interest rates and the availability of capital in the capital markets; and
 
significant sales of our common stock, including sales by the investors following registration of the shares of common stock issued in future offerings by us.
 
These and other factors are largely beyond our control, and the impact of these risks, singularly or in the aggregate, may result in material adverse changes to the market price of our common stock and/or our results of operations and financial condition.
 
 
Our operating results may fluctuate significantly, and these fluctuations may cause our stock price to decline.
 
Operating results will likely vary in the future primarily as the result of fluctuations in our revenues and operating expenses, expenses that we incur, and other factors. If results of operations do not meet the expectations of current or potential investors, the price of our common stock may decline.
 
We are required to pay dividends under certain recent financing arrangements but otherwise we do not expect to pay dividends in the foreseeable future.

We are required to pay a dividend to the holders of our Series A Preferred Stock.  We do not intend to declare dividends payable to common stock shareholders for the foreseeable future.  We anticipate that we will reinvest any future earnings in the development and growth of our business. Therefore, investors will not receive any funds unless they sell their common stock, and stockholders may be unable to sell their shares on favorable terms or at all. Investors cannot be assured of a positive return on investment or that they will not lose the entire amount of their investment in our common stock.
 
Risks Related to the Company’s Corporate Structure
 
PRC laws and regulations governing our business and the validity of certain contractual arrangements are uncertain. If we are found to be in violation, we could be subject to sanctions which could result in significant disruptions to our operations and/or our ability to generate revenues.
 
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, or the enforcement and performance of our contractual arrangements with our vendors and customers. We are considered a foreign person or foreign enterprise under PRC law.  These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
 
The PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our business. We cannot assure our shareholders that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.
 
Risks Related to Doing Business in China

Governmental control of currency conversion may affect the value of your investment.
 
The PRC government imposes controls on the convertibility of Renminbi (“RMB”) into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current structure, our cash receipts are primarily derived from cash transfers from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries and our affiliated entities to remit sufficient foreign currency to pay cash or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our common stock.

Recent PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could limit the ability of our PRC subsidiaries to distribute dividends or otherwise adversely affect the implementation of our acquisition strategy.
 
The PRC State Administration of Foreign Exchange (“SAFE”), issued a public notice in January 2005 concerning foreign exchange regulations on mergers and acquisitions in China. The public notice states that if an offshore company intends to acquire a PRC company, such acquisition will be subject to strict examination by the relevant foreign exchange authorities. The public notice also states that the approval of the relevant foreign exchange authorities is required for any sale or transfer by the PRC residents of a PRC company’s assets or equity interests to foreign entities, such as us, for equity interests or assets of the foreign entities.
 
In April 2005, SAFE issued another public notice clarifying the January notice. In accordance with the April notice, if an acquisition of a PRC company by an offshore company controlled by PRC residents had been confirmed by a Foreign Investment Enterprise Certificate prior to the issuance of the January notice, each of the PRC residents is required to submit a registration form to the local SAFE branch to register his or her respective ownership interests in the offshore company. The SAFE notices do not specify the timeframe during which such registration must be completed. The PRC resident must also amend such registration form if there is a material event affecting the offshore company, such as, among other things, a change to share capital, a transfer of stock, or if such company is involved in a merger and an acquisition or a spin-off transaction or uses its assets in China to guarantee offshore obligations. We have notified our shareholders who are PRC residents to register with the local SAFE branch as required under the SAFE notices. However, we cannot provide any assurances that all of our shareholders who are PRC residents will comply with our request to make or obtain any applicable registrations or approvals required by these SAFE notices. The failure or inability of our  PRC resident shareholders to comply with the registration procedures set forth therein may subject us to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiaries’ ability to distribute dividends to us.
 

As it is uncertain how the SAFE notices will be interpreted or implemented, it is difficult to predict how these regulations will affect our business operations or future strategy. For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operations and financial condition. In addition, if we decide to acquire a PRC company, we cannot assure our shareholders or the owners of such company, as the case may be, that we will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE notices. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
 
Fluctuation in the value of the RMB may have a material adverse effect on your investment.
 
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar. Our revenues and costs are denominated in RMB. An appreciation of RMB against the U.S. dollar would also result in foreign currency translation losses for financial reporting purposes when we translate our RMB denominated financial assets into U.S. Dollars, as the U.S. Dollar is our reporting currency.
 
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents, if applied to us, may subject the PRC resident shareholders of us or our parent company to personal liability and limit our ability to acquire PRC companies or to inject capital into our PRC subsidiary, limit our PRC subsidiary's ability to distribute profits to us or otherwise materially adversely affect us.
 
In October 2005 SAFE issued a public notice, the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, or the SAFE notice, which requires PRC residents, including both legal persons and natural persons, to register with the competent local SAFE branch before establishing or controlling any company outside of China, referred to as an "offshore special purpose company," for the purpose of overseas equity financing involving onshore assets or equity interests held by them.  In addition, any PRC resident that is the shareholder of an offshore special purpose company is required to amend its SAFE registration with the local SAFE branch with respect to that offshore special purpose company in connection with any increase or decrease of capital transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China. Moreover, if the offshore special purpose company was established and owned the onshore assets or equity interests before the implementation date of the SAFE notice, a retroactive SAFE registration is required to have been completed before March 31, 2006. If any PRC shareholder of any offshore special purpose company fails to make the required SAFE registration and amendment, the PRC subsidiaries of that offshore special purpose company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the offshore special purpose company. Moreover, failure to comply with the SAFE registration and amendment requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions. After the SAFE notice, an implementation rule on the SAFE notice was issued on May 29, 2007 which provides for implementation guidance and supplements the procedures as provided in the SAFE notice.
 
Due to lack of official interpretation of SAFE notice and implementation rules, some of the terms and provisions in the SAFE notice remain unclear and implementation by central SAFE and local SAFE branches of the SAFE notice has been inconsistent since its adoption.  Based on the advice of our PRC counsel and after consultation with relevant SAFE officials, the PRC resident shareholders of our parent company, Longwei Petroleum Investment Holdings Limited, have completed their respective SAFE registrations pursuant to the SAFE notice.  Moreover, because of uncertainty over how the SAFE notice and its implementation rules will be interpreted and implemented, and how or whether SAFE notice and implementation rules will apply to us, we cannot predict how it will affect our business operations or future strategies. For example our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with the SAFE notice by our or our parent company's PRC resident beneficial holders. In addition, such PRC residents may not always complete the necessary registration procedures required by the SAFE notice.  We also have little control over either our present or prospective direct or indirect shareholders or the outcome of such registration procedures. A failure by our or our parent company's PRC resident beneficial holders or future PRC resident shareholders to comply with the SAFE notice, if SAFE requires it, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiary's ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
 


Taiyuan, Shanxi

The Company’s headquarters are located at its its fuel depot storage facility in Taiyuan.  The corporate address is No.30 Dajingyu Street, Xiaojingyu Xiang, Wan Bailin District, Taiyuan City, Shanxi Province, PRC 030024.  This facility has a total of 8 large storage tanks with a capacity to store approximately 50,000 metric tons of Products.  We maintain delivery and distribution platforms, including a dedicated rail spur and a vehicle loading and unloading fuel depot station at this facility.  We also maintain a retail outlet at this location.  The Company owns and maintains all assets at this facility.  The product sales revenue contribution from the Taiyuan facility for the years ended June 30, 2012 and 2011 were $256.3 million and $269.7 million, respectively.  All of our product sales revenues earned prior to the year ended June 30, 2009 were earned through this facility.
 
Gujiao, Shanxi
 
In July, 2007 the Company made an initial deposit of approximately $9.2 million on a $30.0 million purchase contract with Shanxi Heitan Zhingyou Petrochemical Co., Ltd. for a second facility in Gujiao.  The Company acquired control of the facility in January 2009 and began operations in November 2009.  The Company retrofitted the existing storage tanks and built a new office and customer service center at the location.  The Guijiao facility address is Langang County, Xiangyang Town, Jiancaoping District, Taiyuan City, Shanxi Province, PRC (just to the east of Gujiao City). The Gujiao Facility has a total of 14 large storage tanks with a capacity to store approximately 70,000 metric tons of Products. We also have 4 tar storage tanks with a capacity of 40,000 metric tons.  We maintain delivery and distribution platforms, including a dedicated rail spur and a vehicle loading and unloading station at this facility.  The Company owns and maintains all assets at this facility.  The product sales revenue contribution from the Gujiao facility for the years ended June 30, 2012 and 2011 were $233.8 million and $188.3 million, respectively.  The Gujiao facility is located in an industrial region, approximately 30 kilometers to the north of our Taiyuan facility.


There are no legal proceedings pending, and we are not aware of any material proceeding contemplated by a governmental authority, to which we are a party or any of our property is subject.
 

Not applicable.

PART II


Public Market for Common Stock

The Company’s common stock has been quoted on the NYSE MKT under the symbol “LPH” since June 22, 2010.  Prior to that date our common stock was quoted on the OTC Bulletin Board under the symbol "LPIH” from November 13, 2008 through June 21, 2010.  The following table sets forth the range of quarterly high and low share price sales of our common stock as reported for the periods indicated:

   
Sales Price
 
Year Ended June 30, 2012
 
High
   
Low
 
First quarter ended September 30, 2011
 
$
1.88
   
$
0.83
 
Second quarter ended December 31, 2011
 
$
1.70
   
$
0.82
 
Third quarter ended March 31, 2012
 
$
1.80
   
$
1.24
 
Fourth quarter ended June 30, 2012
 
$
1.83
   
$
0.99
 
 
 
   
Sales Price
 
Year Ended June 30, 2011
 
High
   
Low
 
First quarter ended September 30, 2010
 
$
2.39
   
$
1.80
 
Second quarter ended December 31, 2010
 
$
3.95
   
$
2.25
 
Third quarter ended March 31, 2011
 
$
2.94
   
$
1.69
 
Fourth quarter ended June 30, 2011
 
$
1.99
   
$
1.25
 
 
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (i) that a broker or dealer approve a person’s account for transactions in penny stocks and (ii) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person’s account for transactions in penny stocks, the broker or dealer must (i) obtain financial information and investment experience and objectives of the person; and (ii) make a reasonable determination that the transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the Commission relating to the penny stock market, which, in highlight form, (i) sets forth the basis on which the broker or dealer made the suitability determination and (ii) that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading, and about commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
 
As of September 13, 2012, we had 29 shareholders of record.
 
Dividends
 
The Company has not paid any cash dividends to common stock shareholders.  We are required to pay a 6.0% annual dividend on a quarterly basis to the holders of our outstanding Series A Preferred Stock.  The declaration of any future cash dividends is at the discretion of the Company’s board of directors and depends  upon the Company’s earnings, if any, the Company’s capital requirements and financial position, the Company’s general economic conditions, and other pertinent conditions.  It is the Company’s present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in the Company’s business operations.

For the years ended June 30, 2012 and 2011 the Company paid a cash dividend to holders of its Series A Preferred Stock of $60,368 and $201,467, respectively.

Transfer Agent
 
Our transfer agent is Corporate Stock Transfer, 3200 Cherry Creek Drive South, Suite 430, Denver, CO 80209.
 
The Company is authorized to issue 600,000,000 shares, in aggregate, consisting of 500,000,000 shares of common stock, no par value, and 100,000,000 shares of preferred stock, no par value. The Company's Certificate of Incorporation authorizes the Board of Directors (the “Board”) to determine the preferences, limitations and relative rights of any class or series of preferred stock prior to issuance.  Each such class or series must be given distinguishable designated rights prior to issuance. As of June 30, 2012, 914,643 shares of the Company’s Series A Preferred Stock and 100,889,966 shares of the Company’s common stock were issued and outstanding.  As of June 30, 2011, 914,643 shares of the Company’s Series A Preferred Stock and 100,751,966 shares of the Company’s common stock were issued and outstanding.
 
Recent Sale of Securities
 
On June 25, 2012, the Company issued 129,000 shares of previously accrued restricted common stock accounted for as stock based compensation to its Chief Financial Officer, directors and consultants, under the 2012 Equity Incentive Plan.

On June 29, 2012, the Company issued two independent directors 6,000 shares and 3,000 shares of restricted common stock, respectively, for their services to the Company as part of their board compensation under the 2012 Equity Incentive Plan.

The above referenced transactions did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
 

Securities Authorized for Issuance under Equity Compensation Plans
 
The Company’s Board of Directors believes that in order to attract and retain the services of executives and other key employees, it is necessary for the Company to have the ability and flexibility to provide a compensation package which compares favorably with those offered by other companies. Accordingly, on April 2, 2012, the Board adopted, subject to stockholder approval, the Company’s 2012 Equity Incentive Plan, covering 400,000 shares of Common Stock. The 2012 Plan has been designed to provide the Compensation Committee with an integral resource as it evaluates the Company’s compensation structure, performance incentive programs, and long-term equity targets for executives and key employees during 2012.   Shareholders holding a majority of the outstanding voting power of the Company’ common stock approved the 2012 Equity Incentive Plan..
 
The following table sets forth information regarding the Company’s 2012 Equity Incentive Plan:
 
Equity Compensation Plan Information
 
 
Plan category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
 
Weighted-average exercise price of outstanding options, warrants and rights
(b)
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
 
Equity compensation plans approved by security holders
  -   -   193,000  
Equity compensation plans not approved by security holders
  -   -   -  
Total
  -   -   193,000  


The Company derived the selected historical consolidated financial data presented below from its audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. You should refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in Part II of this Annual Report on Form 10-K and the notes to the accompanying consolidated financial statements for additional information regarding the financial data presented below, including matters that might cause this data not to be indicative of the Company’s future financial condition or results of operations. In addition, you should note the following information regarding the selected historical consolidated financial data presented below.
 
(In thousands, except per share data)
As of and for the Year Ended June 30,
 
2012
   
2011
   
2010
   
2009
   
2008
 
 
Results of Operations:
                             
Net Revenues
 
$
510,593
   
$
481,553
   
$
343,249
   
$
196,811
   
$
143,788
 
    Annual Revenue Growth
   
6.0%
     
40.3%
     
74.4%
     
36.9%
     
53.4%
 
Gross Profit
   
88,475
     
97,823
     
69,247
     
39,470
     
36,987
 
    Gross Profit Margin
   
17.3%
     
20.3%
     
20.2%
     
20.1%
     
25.7%
 
Net Income Attributable to Common Shareholders
   
65,055
     
62,517
     
41,094
     
21,777
     
20,715
 
    Net Profit Margin – Attributable to Common Shareholders
   
12.7%
     
13.0%
     
12.0%
     
11.1%
     
14.4%
 
                                         
Earnings Per Share
                                       
    Basic Earnings Per Common Share
 
$
0.65
   
$
0.64
   
$
0.48
   
$
0.28
   
$
0.28
 
    Diluted Earnings Per Common Share
 
$
0.61
   
$
0.62
   
$
0.43
   
$
0.28
   
$
0.27
 
                                         
Weighted Average Common Shares Outstanding
                                       
    Basic
   
100,765
     
97,872
     
85,979
     
76,537
     
73,341
 
    Diluted
   
101,773
     
101,684
     
95,262
     
78,524
     
75,739
 
                                         
Financial Position at Year-End:
                                       
Current Assets
 
$
207,997
   
$
142,550
   
$
143,994
   
$
83,397
   
$
90,831
 
Property and Equipment, net (including deposit)
   
134,305
     
130,755
     
43,577
     
36,745
     
2,637
 
Total Assets
   
342,302
     
273,305
     
187,571
     
120,142
     
93,468
 
Total and Current Liabilities
   
8,757
     
11,578
     
9,791
     
5,219
     
4,927
 
Shareholders' Equity
   
333,545
     
261,727
     
177,780
     
114,923
     
88,541
 
 
 
 
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide information that is supplemental to, and should be read together with, the Company’s consolidated financial statements and the accompanying notes contained in this Annual Report on Form 10-K. Information in this Item 7 is intended to assist the reader in obtaining an understanding of the consolidated financial statements, the changes in certain key items in those financial statements from year to year, the primary factors that accounted for those changes, and any known trends or uncertainties that the Company is aware of that may have a material effect on the Company’s future performance, as well as how certain accounting principles affect the consolidated financial statements. MD&A includes the following sections:
 
 
● 
Highlights and Executive Summary 
 
 
 
● 
Results of Operations—an analysis of the Company’s consolidated results of operations, for the two years presented in the consolidated financial statements
 
 
 
 
● 
Liquidity and Capital Resources—an analysis of the effect of the Company’s operating, financing and investing activities on the Company’s liquidity and capital resources
 
 
 
● 
Off-Balance Sheet Arrangements—a discussion of such commitments and arrangements 
 
 
 
● 
Critical Accounting Policies and Estimates—a discussion of accounting policies that require significant judgments and estimates
 
 
 
● 
New Accounting Pronouncements—a summary and discussion of the Company’s plans for the adoption of relevant new accounting standards.
 
The following discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in "Special Note Regarding Forward-Looking Statements," "Market Data" and "Risk Factors."
 
Highlights and Executive Summary

Longwei Petroleum Investment Holding Limited (the “Company”) is an energy company engaged in the wholesale distribution of finished petroleum products in the PRC.  Our oil and gas operations consist of transporting, storage and selling finished petroleum products, entirely in the PRC.  We purchase diesel, gasoline, fuel oil and solvents from various petroleum refineries in the PRC. Our headquarters are located in Taiyuan, Shanxi Province. We have a storage capacity for our Products of 120,000 metric tons located at our fuel depot storage facilities in Taiyuan and in Gujiao, Shanxi, 50,000 metric tons and 70,000 metric tons of capacity, respectively, at each location. The Gujiao facility was acquired in January of 2009 and commenced operations in November of 2010.  We are 1 of 3 licensed intermediaries in Taiyuan and the sole licensed intermediary in Gujiao that operates its own large scale storage tanks. We have the necessary licenses to operate and sell Products not only in Shanxi but throughout the entire PRC.  Our storage tanks have the largest storage capacity of any private enterprise in Shanxi.  We seek to earn profits by selling our Products at competitive prices with timely delivery to transportation companies, coal mining operations, power supply customers, large-scale gas stations and small, independent gas stations. We also earn revenue under an agency fee by acting as a purchasing agent for other intermediaries in Shanxi, and through limited sales of diesel and gasoline at two retail gas stations, each located at our facilities. The sales price and the cost basis of our products is largely dependent on regulations and price control measures instituted and controlled by the PRC government as well as the price of crude oil. The price of crude oil is subject to fluctuation due to a variety of factors, all of which are beyond our control.

We were incorporated under the laws of the State of Colorado on March 17, 2000 as Tabatha II, Inc.  On October 12, 2007, we changed our name to Longwei Petroleum Investment Holding Limited.

For the year ended June 30, 2012, we reported revenues of approximately $510.6 million, an increase of 6.0% from revenues of approximately $481.6 million reported for the year ended June 30, 2011.

 
 
Results of Operations

The following tables set forth key components of the Company’s results of operations for the years ended June 30, 2012 and 2011, respectively. 
 
For the Year Ended June 30, 2012 Compared to the Year Ended June 30, 2011
                 
 (In thousands, except per share data)
   
2012
     
2011
 
Revenues
 
$
510,593
   
$
481,553
 
Costs of Revenues
   
422,118
     
383,730
 
Gross Profit
   
88,475
     
97,823
 
Operating Expenses
   
4,700
     
6,154
 
Operating Income
   
83,775
     
91,669
 
    Derivative Income (Expense)
   
2,573
     
(5,447
)
    Interest Income (Expense)
   
20
     
20
 
Income Before Taxes
   
86,368
     
86,242
 
Provision for Income Taxes
   
(21,253
)
   
(23,524
)
Net Income
   
65,115
     
62,718
 
    Foreign Currency Translation Adjustment
   
6,598
     
12,983
 
Comprehensive Income
   
71,713
     
75,701
 
Net Income
   
65,115
     
62,718
 
    Preferred Stock Dividends
   
(60
)
   
(201
)
Net Income Attributable to Common Shareholders
 
$
65,055
   
$
62,517
 
Basic Earnings Per Share
 
$
0.65
   
$
0.64
 
Diluted Earnings Per Share
 
$
0.61
   
$
0.62
 
 
All dollar figures below are “in thousands” except for $/mt and per share data.
 
Revenues

Revenues increased by $29,040 or 6.0% to $510,593 for the year ended June 30, 2012 from $481,553 for the year ended June 30, 2011. The Taiyuan and Gujiao fuel storage depots generated revenues of $256,315 and $233,750, respectively, and we earned an additional $20,528 in agency fees for the fiscal year ending June 30, 2012.  The Taiyuan and Gujiao fuel storage depots generated revenues of $269,737 and $188,348, respectively, and we earned an additional $23,468 in agency fees for the fiscal year ending June 30, 2011.  The sales increase was primarily due to the increase in product sales price.  The weighted average sales price per metric ton (“mt”) of petroleum products sold increased approximately 17.7% to $1,199/mt from $1,019/mt for the years ended June 30, 2012 and 2011, respectively.

Our revenues are derived from two segments including direct product sales and agency fees.  For direct product sales we purchase, take physical possession, and sell diesel, gasoline, fuel oil and solvents.  For agency fees we act as a purchasing agent earning a fee or commission by allowing intermediaries to use our licenses and buying power to purchase directly from the refineries.  During the year ended June 30, 2012, our product sales increased $31,980 or 7.0% from $458,085 to $490,065, and our agency fees decreased $2,940 or 12.5% from $23,468 to $20,528, respectively over the year ended June 30, 2011.

For the years ended June 30, 2012 and 2011, direct product sales revenues accounted for 96.0% and 95.1% of total revenues and agency fees accounted for 4.0% and 4.9% of total revenues, respectively.  

Our revenue and volume activity are broken down below by facility, by quarter:

   
For the Year Ending June 30, 2012 - Quarterly Periods Ended
       
                               
   
September 30,
   
December 31,
   
March 31,
   
June 30,
   
FYE 2012
 
(in thousands, except metric tons)
 
2011
   
2011
   
2012
   
2012
   
TOTAL
 
Product Sales:
                             
   Taiyuan Facility
 
$
58,249
   
$
64,832
   
$
60,558
   
$
72,676
   
$
256,315
 
   Gujiao Facility
   
54,843
     
56,261
     
64,293
     
58,353
     
233,750
 
Total Product Sales
   
113,092
     
121,093
     
124,851
     
131,029
     
490,065
 
                                         
Agency Fees
   
5,539
     
5,291
     
4,370
     
5,328
     
20,528
 
                                         
Total Revenues
 
$
118,631
   
$
126,384
   
$
129,221
   
$
136,357
   
$
510,593
 
                                         
Sales Volume: (mt)
                                       
   Taiyuan Facility
   
50,018
     
55,403
     
49,956
     
63,077
     
218,454
 
   Gujiao Facility
   
43,844
     
47,542
     
51,900
     
47,140
     
190,426
 
Total Sales Volume
   
93,862
     
102,945
     
101,856
     
110,217
     
408,880
 
                                         
Weighted average selling price per mt
 
1,205/mt
   
1,176/mt
   
1,226/mt
   
1,188/mt
   
1,199/mt
 
 
 
   
For the Year Ending June 30, 2011 - Quarterly Periods Ended
       
                               
   
September 30,
   
December 31,
   
March 31,
   
June 30,
   
FYE 2011
 
(in thousands, except metric tons)
 
2010
   
2010
   
2011
   
2011
   
TOTAL
 
Product Sales:
                             
   Taiyuan Facility
 
$
66,021
   
$
69,120
   
$
63,100
   
$
71,612
   
$
269,853
 
   Gujiao Facility
   
41,465
     
45,398
     
51,296
     
50,073
     
188,232
 
Total Product Sales
   
107,486
     
114,518
     
114,396
     
121,685
     
458,085
 
                                         
Agency Fees
   
5,862
     
5,666
     
5,178
     
6,762
     
23,468
 
                                         
Total Revenues
 
$
113,348
   
$
120,184
   
$
119,574
   
$
128,447
   
$
481,553
 
                                         
Sales Volume: (mt)
                                       
   Taiyuan Facility
   
73,388
     
71,639
     
60,140
     
61,338
     
266,505
 
   Gujiao Facility
   
45,686
     
46,846
     
48,076
     
42,431
     
183,039
 
Total Sales Volume
   
119,074
     
118,485
     
108,216
     
103,768
     
449,544
 
                                         
Weighted average selling price per mt
 
903/mt
   
967/mt
   
1,057/mt
   
1,173/mt
   
1,019/mt
 
 
   
For the Year Ended
       
(in thousands, except metric tons)
 
June 30, 2012
   
June 30, 2011
   
% Change
 
Product Sales:
                 
   Taiyuan Facility
 
$
256,315
   
$
269,853
     
(5.0%
)
   Gujiao Facility
   
233,750
     
188,232
     
24.2%
 
Total Product Sales
   
490,065
     
458,085
     
7.0%
 
                         
Agency Fees
   
20,528
     
23,468
     
(12.5%
)
                         
Total Revenues
 
$
510,593
   
$
481,553
     
6.0%
 
                         
Sales Volume: (mt)
                       
   Taiyuan Facility
   
218,454
     
266,505
     
(18.0%
)
   Gujiao Facility
   
190,426
     
183,039
     
4.0%
 
Total Sales Volume
   
408,880
     
449,544
     
(9.0%
)
                         
Weighted average selling price per mt
 
$
1,199/mt
   
$
1,019/mt
     
17.7%
 

We continue to allocate product sales between our two facilities, Taiyuan and Gujiao, to better serve our customer base.   The two facilities are approximately 30 kilometers apart and their service markets overlap.  Total sales volume for the year ended June 30, 2012 dropped 9.0% to 408,880mt from 449,544mt for the year ended June 30, 2011.  The drop in volume was primarily due to lower demand from certain customers because of rising fuel prices between the periods and the general economic slowdown in the PRC.  During this timeframe we also declined certain sales opportunities to maintain our historical margin range during a period of rising inventory costs, as well as carefully managing our cash flow due to the large deposit paid for the Huajie Petroleum assets.  The deposit of $87,103 has been paid from cash generated through operations.

The increase in the price per mt of petroleum products was due to the increase in international crude oil prices and corresponding price increases set by the PRC to retail petroleum prices.  During the time frame for year ended June 30, 2011 through the year ended June 30, 2012, the PRC increased retail petroleum prices six times and decreased retail prices three times.

 
Brent Crude Price vs. PRC Retail Prices – Price Trend Lines
 
 
Revenues for our fourth fiscal quarter of 2012 (three months ended June 30, 2012) increased $7,136 or 5.5% to $136,357 from $129,221 for the third fiscal quarter of 2012 (three months ended March 31, 2012).   Sales volume for the fourth fiscal quarter of 2012 increased 8,361 mt or 8.2% to 110,217 mt from 101,856 mt for the third fiscal quarter of 2012.  During the fourth fiscal quarter of 2012, the weighted average sales price per mt of petroleum products sold decreased approximately $38/mt or 3.1% to $1,188/mt from $1,226/mt because of PRC retail price decreases in both May and June 2012.  These price decreases more closely aligned the PRC retail petroleum prices to the world prices during the fourth fiscal quarter 2012 based on the decrease in crude oil prices as seen in the chart above.

Our direct product sales revenues mix for the year ended June 30, 2012 was split approximately 45.8% diesel, 49.7% gasoline, 2.0 fuel oils and 2.5% solvents.  Our direct product sales revenues mix for the year ended June 30, 2011 was split approximately 48.3% diesel, 49.4% gasoline, 1.0% fuel oils and 1.3% solvents.

Percentage of Product Sales Revenue by Customer Class for the Years Ended June 30
 
Customers Classification
 
2012
   
2011
 
Industrial Users, Coal Operations & Power Generation
    51 %   $ 249,933       50 %   $ 229,043  
Large-Scale Gas Stations
    35 %     171,523       34 %     155,748  
Small, Independent Gas Stations
    14 %     68,609       16 %     73,294  
Total Product Sales Revenues
    100 %   $ 490,065       100 %   $ 458,085  

Our industrial customers are primarily transportation companies, coal mining operations and power generation plants, which use diesel, gasoline, fuel oil and solvents and accounted for approximately 51% and 50% of our product revenues for the years ended June 30, 2012 and 2011, respectively.  Industrial users remain our largest customer category primarily because of our Gujiao facility, which is strategically located in an industrial region.  Industrial customers are also our primary source of agency fee revenues because of the large quantity of product required for their operations.  The decrease in agency fee revenues for the year ended June 30, 2012 was primarily due to the general economic slowdown in the PRC, which led to lower demand for the large direct orders from industrial customers.
 
Large-scale gas stations accounted for approximately 35% and 34% of our product revenues for the years ended June 30, 2012 and 2011, respectively.  Our third largest group of customers consists of small, independent gas stations. These small, independent operators were impacted by rising consumer prices and decreased as a percentage of product revenues to approximately 14% from 16% for the year ended June 30, 2012 and 2011, respectively. These customers primarily buy diesel and gasoline to support their retail network of gas stations to fuel the growing demand of new automobiles on the roads in the PRC.  These customers depend on our timely delivery and customer service compared to the larger state-owned enterprises.
 
The Company has forty-six major customers, which each account for at least 1% (or approximately $5.1 million) or more of total revenues.  No customer accounted for more than 2.7% or 2.8% of our total revenues, respectively, for the years ended June 30, 2012 and 2011.  The Company’s top ten customers by revenues for the years ended June 30, 2012 and 2011 cumulatively represented approximately 23.7% and 24.0% of our total revenues, respectively.  No customer accounted for more than 7.3% or 8.7% of our total accounts receivable balance at June 30, 2012 and 2011, respectively.
 

Costs of Sales

Costs of sales increased by $38,388 or 10.0% to $422,118 for the year ended June 30, 2012 compared to $383,730 for the year ended June 30, 2011.  As a percentage of total revenues our total cost of sales between the periods increased by 3.0% as a percentage of revenues to 82.7% from 79.7%.  The increase in cost of sales was primarily due to higher weighted average inventory costs during a period of rising international prices and an extended period of lower retail prices to contain inflation implemented by the PRC.  During the year ended June 30, 2012, the PRC retail price was lowered in October at a time international crude prices subsequently increased.  The PRC later adjusted retail prices up in February and March 2012 and then back down in May and June 2012 to more accurately reflect worldwide crude oil prices.  (Our total gross profit decreased 3.0% of total revenues, or by $9,348 or 9.6% to $88,475 from $97,823 for the years ended June 30, 2012 and 2011, respectively.)

The Company also experienced a drop in agency fee revenues of $2,940 or 12.5% to $20,528 during the year ended June 30, 2012 compared to $23,468 during the year ended June 30, 2011.  When the Company earns higher agency fees, the net effect lowers the percentage of total cost of sales because there are no costs associated with the agency fees.

We pay market prices to our refinery suppliers and carefully manage our inventory levels to adjust to pricing fluctuations. The twelve-month weighted average cost basis per metric ton of Product we sold increased by $178/mt or 20.8% to $1,032/mt from $854/mt during the years ended June 30, 2012 and 2011, respectively.  During the year ended June 30, 2012, the Company’s gross profit margin on product sales declined 2.3% to 13.9% from 16.2% during the year ended June 30, 2011, because of higher inventory costs due to rising international crude oil prices.
 
   
For the Years Ending June 30, 2012 and 2011 - Quarterly Periods Ended
 
Product Sales Revenues & Cost*
 
September 30
   
December 31
   
March 31
   
June 30
   
FYE TOTAL
 
                               
For the Year Ended June 30, 2012
                             
    Weighted average selling price/mt
  $ 1,205/mt     $ 1,176/mt     $ 1,226/mt     $ 1,188/mt     $ 1,199/mt  
    Weighted average cost/mt
    1,029/mt       1,010/mt       1,054/mt       1,036/mt       1,032/mt  
Gross profit/mt
  $ 176/mt     $ 166/mt     $ 172/mt     $ 152/mt     $ 167/mt  
Gross profit margin
    14.6%       14.1%       14.0%       12.8%       13.9%  
                                         
For the Year Ended June 30, 2011
                                       
    Weighted average selling price/mt
  $ 903/mt     $ 967/mt     $ 1,057     $ 1,173/mt     $ 1,019/mt  
    Weighted average cost/mt
    769/mt       816/mt       882       967/mt       854/mt  
Gross profit/mt
  $ 134/mt     $ 151/mt     $ 175     $ 206/mt     $ 165/mt  
Gross profit margin
    14.8%       15.6%       16.6%       17.6%       16.2%  
 
*Average product sales revenues and cost of revenues based on quarterly contribution and volume.  Cost of revenues includes product costs, taxes and surcharges, and delivery costs.
 
   
For the Year Ended
       
   
June 30, 2012
   
June 30, 2011
   
% Change
 
Product Sales Revenue and Cost per metric ton (“mt”)
                 
   Weighted average selling price/mt
  $ 1,199/mt     $ 1,019/mt       17.7%  
   Weighted average cost/mt
    1,032/mt       854/mt       20.8%  
Gross profit/mt
  $ 167/mt     $ 165/mt       1.2%  
                         
Gross profit margin
    13.9%       16.2%       (2.3%)  
 
The cost basis of finished petroleum products fluctuates during the year due to the pricing mechanism in place in the PRC.  The price of finished petroleum products is established by a PRC regulatory body, National Regulatory Development Commission (“NDRC”), under a formula based on the movement of international prices over a look-back period of 22 working days and generally resets when the price increases or decreases by 4%.  The NDRC adjusts domestic finished oil prices by modifying the retail price of gasoline and diesel in all provinces, which has an upstream pricing effect over the wholesale price of finished oil products.  We attempt to manage our costs by utilizing our storage capacity to adjust inventory levels based on the anticipated movement of industry pricing to take advantage of pricing and supply and demand fluctuations within the marketplace.  The Company’s average age of inventory for the year ended June 30, 2012 was approximately 45 days as the Company held more inventory to take advantage of additional product purchases for on-hand inventory before a period of rising prices by utilizing our large storage capacity.  This compares to the Company’s average age of inventory for the year ended June 30, 2011 of approximately 41 days during a time of fluctuating prices for international crude oil.  During this time we also increased our advances to suppliers to lock in pricing based on uncertainty associated with the international crude oil price fluctuations from tensions in the Middle East.  The Company is continually working to optimize its inventory turnover, which expands sales capacity based on increased inventory movement.  In times of anticipated rising prices the Company tries to lock-in pricing and increase inventory on-hand prior to the PRC pricing mechanism adjusting the set retail price upwards.  Our supplier advance balance with refineries allows us to lock-in pricing and supply so that we can react quickly to purchases based on anticipated movements in the international price of crude oil and the timing of the PRC pricing levels adjustments.
 

The Company monitors its business in two segments, product sales and agency fees.  Cost of product sales is allocated to product sales and includes the cost to purchase product and the costs, if any, to transport the product to the Company and to deliver the goods to the customer. Based on the direct product sales revenue, costs of product sales increased by $38,388 or 10.0% to $422,118 for the year ended June 30, 2012 from $383,730 for the year ended June 30, 2011.   As a percentage of direct product sales revenues our cost of product sales increased to 86.1% from 83.8% for the years ended June 30, 2012 and 2011, respectively.  The 2.3% increase in direct product sales costs was primarily due to higher weighted average inventory costs during a period of rising international prices and an extended period of lower retail prices to contain inflation implemented by the PRC.  (Our direct product sales gross profit decreased 2.3% of direct product sales revenues, or by $6,408 or 8.6% to $67,947 from $74,355 for the years ended June 30, 2012 and 2011, respectively.)

The cost of agency fee service revenues consists of selling commission, transportation or other costs, if any, associated with the agency fee arrangement.  For years ended June 30, 2012 and 2011, respectively, the Company stopped transporting or handling the products associated with the agency sales and only acts in a broker capacity allowing other intermediaries to use its licenses and buying power to purchase product directly from the refineries.  The Company considers any costs associated with agency fee revenues immaterial and has not allocated any costs to agency fees for the years ended June 30, 2012 and 2011, respectively.  For the years ended June 30, 2012 and 2011, agency fees contributed to improve overall gross margin as a percentage of total sales by approximately 3.4% and 4.1%, respectively.
 
Operating Expenses

Operating expenses for the year ended June 30, 2012 decreased $1,454 or 23.6% to $4,700 as compared to $6,154 for the year ended June 30, 2011, primarily due to lower professional fees paid during the period. As a percentage of revenues, operating expenses declined to 0.9% for the year ended June 30, 2012 from 1.3% for the year ended June 30, 2011.  Operating expenses during 2012 consisted of non-cash expenses of $165 in stock based compensation and $2,683 in depreciation.  The Company paid $1,852 in cash payments for salaries, consulting and professional fees, insurance and travel primarily related to fees and expenses related to the operations of the public company.  Operating expenses during 2011 consisted of non-cash expenses of $902 in stock based compensation and $2,266 in depreciation.  The Company paid $2,986 in cash payments for salaries, consulting and professional fees, insurance and travel primarily related to fees and expenses related to the operations of the public company.  

Operating Income

Operating income for the year ended June 30, 2012 decreased $7,894 or 8.6% to $83,775 from $91,669 for the year ended June 30, 2011, primarily due to the cost increases in the petroleum market and retail price decrease in the PRC, which reduced the Company’s overall gross profit margin 3.0% between the periods.

Income Before Taxes

Income before taxes for the year ended June 30, 2012 increased $126 or 0.1% to $86,368 as compared to $86,242 for the year ended June 30, 2011 primarily due to the gain of $2,573 associated with the accounting for the non-cash warrant derivative liability charge for the year ended June 30, 2012 compared to the expense charge of $5,447 for the year ended June 30, 2011.

In accordance with GAAP, we record a non-cash gain or expense charge for the change in the fair value of the warrant derivative. The financial instrument classified as derivatives consisted of stock warrants issued in connection with our October 2009 Financing.  The warrants have a three year term that expire October 29, 2012 and have an exercise price per share of $2.255.  The increase in the warrant derivative liability gain for the year ended June 30, 2012 was attributable to the change in the calculation variables that factors in stock price, risk-free rate, volatility and duration outstanding for the warrants.

The interest income remained the same between the periods at $20.  The Company had no interest expense for the periods since it had no long-term debt for the years ended June 30, 2012 and 2011, respectively.

Income tax expense for the year ended June 30, 2012 decreased $2,271 or 9.7% to $21,253 from $23,524 for the year ended June 30, 2011, due to the decrease in operating income earned during the periods.
 
Net Income

Net income increased by $2,397 or 3.8% to $65,115 for the year ended June 30, 2012 from $62,718 for the year ended June 30, 2011 due to the reasons set forth above.
 
Comprehensive income for the year ended June 30, 2012 decreased $3,988 or 5.3% to $71,713 from $75,701 for the year ended June 30, 2011, due to the decrease in foreign currency translation adjustment of $6,385 or 49.2% to $6,598 from $12,983 for the years ended June 30, 2012 and 2011, respectively.  The lower foreign currency translation adjustment was primarily driven by the slower currency devaluation of the Chinese RMB versus the US Dollar for the year ended June 30, 2012 compared to the year ended June 30, 2011. 
 

Net income attributable to common shareholders increased by $2,538 or 4.1% to $65,055 for the year ended June 30, 2012 from $62,517 for the year ended 2011.  For the year ended June 30, 2012 we paid $60 in cash dividends on preferred stock compared to $201 in cash dividends paid on preferred stock for the year ended June 30, 2011.   

Basic and Diluted Income Attributable to Common Shareholders per Share

The Company’s basic net income attributable to common shareholders per share increased $0.01 or 1.6% to $0.65 from $0.64 for the year ended June 30, 2012 and 2011, respectively.

The Company’s diluted net income attributable to common shareholders per share decreased $0.01 or 1.6% to $0.61 fr